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Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers & Ors [2006] QCA 335 (5 September 2006)

Last Updated: 5 September 2006

SUPREME COURT OF QUEENSLAND

[1] WILLIAMS JA: Keane JA in his reasons has set out extensively the background circumstances in which this appeal has to be determined. I agree with the conclusion he has reached, but it is necessary that I set out my own reasons for so doing. I will only refer to those facts which are necessary in order for me to articulate my reasons. Except where there is some inconsistency between my approach and that adopted by Keane JA, I agree with the reasoning of Keane JA.

[2] Notwithstanding the numerous assertions of fact and bases on which relief was sought as set out in the statement of claim as finally amended, the case presented to the trial judge for determination was much more confined. The respondent made loans to five borrowers who defaulted when the loans were ultimately called up. The loss sustained by the respondent with respect to those five loans was $3,629,000. The question put to the trial judge for his determination was whether or not that loss was caused by breach of the appellant's duty as a director in the manner particularised so that the respondent could recover that amount from him.

[3] Once the issue was formulated in that way the court was only concerned with breaches of the appellant's duty as a director which might have been causative of that loss. It was irrelevant for purposes of the proceeding that the evidence may have established that the appellant was in breach of his duties as a director in ways which were not causally connected with the losses incurred by the respondent on the five loans.

[4] It should be noted that at least 139 loans were made pursuant to the scheme and almost all of the $25 million bank facility was at one time on-lent by the respondent pursuant to the administrative arrangements put in place. There were problems recovering from the borrowers in a number of cases, but the respondent only relied on evidence relating to the five loans in order to establish a case against the appellant.

[5] There is no dispute as to the details of the five loans and the quantum of the loss in each case. The following are the particulars:

1. Jumarsh Pty Ltd (Jumarsh)

There was an initial loan of $342,000 on 12 March 1999. A further $100,000 was advanced on 14 July 1999, and finally on 3 September 1999 there was another further advance of $400,000. Thus the total amount lent was $862,000 and when the loan was called up there was a loss of $692,000.

2. Venola Pty Ltd (Venola)

The initial loan in May 1999 was for $350,000. There was a further advance of $450,000 on 22 July 1999. The full amount lent, namely $800,000, was not repaid on demand.

3. Spiller Holdings Pty Ltd (Spiller)

The initial loan was for $143,500 on 17 June 1999. There were further advances of $102,500 on 14 July 1999, $80,000 on 6 October 1999, and finally $276,000 on 24 February 2000. Thus the total amount lent was $602,000 and nothing was repaid when demand was made.

4. Gary Peter Moss (Moss)

The initial loan was for $350,000 on 21 October 1999. There were further advances of $300,000 on 17 November 1999 and $85,000 on 28 April 2000. Thus the total amount lent was $735,000, and nothing was repaid on demand.

5. John McCouat (McCouat)

The initial advance was of $100,000 on 19 April 2000, and there was then a further advance of $700,000 on 15 May 2000. Thus the total amount lent was $800,000, and nothing was repaid on demand.

In each case the final demand was made in about mid-2001 when the respondent's facility with the Bank was withdrawn following on the lapsing of the insurance cover with respect to each of the loans.

[6] It was not in dispute that the principal, if not sole, business of the respondent was that of lending money to accountants up to a maximum of 80% of their certified accounts receivable under a program which was called the "Accountants' Fee Funding Program". The learned trial judge found that the appellant "was introduced to the scheme in about the middle of 1997". The finding was that the promoters of the scheme at that stage were Sheers, Howes, Romp and Stewart.

[7] An ASIC search with respect to the respondent indicates that it was incorporated on 24 December 1997, and acquired as a shelf company on that date by Gold Ribbon Corporate Services Pty Ltd and Romp, each then holding one of the two shares therein. The search also reveals that as and from 24 December 1997 the directors were Howes, Romp, Stewart and the appellant. Sheers and Taylor were appointed directors on 28 June 1999.

[8] There is no doubt that in the first half of 1998 the appellant was involved in discussion with others, Romp in particular, as to the basis on which the business of lending to accountants would be conducted. Exhibit TMD5 to the appellant's affidavit of 23 February 2005 is a document which passed between Romp and the appellant in April 1998 dealing with a proposed administrative basis on which the scheme would be conducted. There can be no doubt that the document reflects the appellant's thinking at that time as to what administrative arrangements were required. Not surprisingly the document refers to a person described as the "risk manager" carrying out "due diligence on applicant". At that stage it was envisaged that the appellant's company Commercial Recovery Management Pty Ltd ("CRM") would be responsible for administering the scheme and carrying out the due diligence. The following extracts from the document illustrate what was then being considered:

"An accounting practice will be required in the first instance to register for participation in the program. This involves completing an application form setting out full particulars of the entity to which fees are paid together with all relevant information (see form herewith).

... [the respondent] will request CRM to carry out a due diligence in relation to the applicant. ...

Risk management –
On all applications the lender will be provided with:

• Copy of the due diligence report by CRM;

...

• Asset and Liability Statements of Directors;
...
Advances over $250,000
All of the above plus
• Financials last 2 years."

[9] There was also an observation that "risk control mechanisms shall be put in place by CRM".

[10] Further, it is clear that by about April 1998 pursuant to the "Matrix" designed by the appellant and Romp it was proposed that loans be made to accounting practices up to a maximum of 80% of aged receivables. It was apparently considered, at least by the appellant and Romp, that advances could be made on that basis without the borrowers having to provide any security, other than the personal guarantees of directors if the borrower was a company. The respondent's principal security would be the insurance cover on the loan.

[11] By 22 May 1998 a stage had been reached where Romp sent the following message to the appellant:

"Colonial have instructed Michael Stewart to prepare a draft administration agreement between Gold Ribbon (Accountants) Pty Ltd and the bank. This will be along the lines of the Real Estate Fee Product.

Can you prepare draft administration agreement between CRM and Gold Ribbon (Accountants) Pty Ltd.
...
I confirm meeting with Colonial on Thursday, 28 May 1998 at 9.30am. ...."

[12] Romp, Stewart and the appellant met with officers of the bank on that day; the meeting lasted some 2 hours. Relevantly the bank then wrote to the directors of the respondent on 20 August 1998 confirming approval of a Bank Bill facility to the amount of $25,000,000. The letter stated that the facility was to enable the respondent to carry out the "Scheme known as the Accountants' Fee Funding Program". It went on to say with respect thereto that the "final policy document is to be vetted by the Bank's legal advisers and must be to their absolute satisfaction and to the Bank's absolute satisfaction." There was reference therein to CRM and the clear inference is that the bank then believed that CRM would be responsible for risk management under the scheme. The advance was subject to an "insurance policy issued by HIH" covering the amount drawn down from time to time. Romp and Stewart accepted that offer on behalf of the respondent by signing the letter on 9 September 1998.

[13] It is probably of little significance for present purposes, but it should be noted that the appellant in his affidavit said that he did not see a copy of that letter until after the commencement of these proceedings.

[14] It is not entirely clear what documentation was shown to the bank at the meeting on 28 May 1998, but it can be reasonably inferred that there was a document similar to, if not identical with, exhibit TMD5.

[15] By about August 1998 the appellant was in dispute with Sheers and Howes over a number of matters, probably primarily his entitlement to shares in the respondent. That provided a background to the decision taken by directors of the respondent that CRM should not be the administrator of the program. Stewart said in his affidavit of 18 February 2005:

"As at 19 August 1998 there were four (4) directors of the plaintiff's company namely Howes, Romp, Dunn and myself. I had decided that to advance the interests of the plaintiff I would support Howes as the person who would undertake the task of management of the accounting product. To my observation Romp also supported Howes."

[16] In his affidavit of 17 December 2004 Romp said:

"Sherie Schweitzer, who was the defacto partner of Sheers, was chosen by the directors to carry out the administration of the Program because she presented well and had experience administering financial arrangements and she was proposing to carry it out through a separate company, being Austide Holdings Pty Ltd (Austide). Sherie indicated she owned a company called Austide and would contract to GRA to administer the Program. I was unaware that her defacto, Richard Sheers had an interest in Austide."

[17] Between about August 1998 and May 1999 the appellant appears not to have been directly involved in making decisions with respect to the respondent's business. He did not attend, or was not invited to attend, directors' meetings. These matters are fully discussed in the reasons for judgment of Keane JA and I do not wish to add anything to what is said therein about this aspect of the case.

[18] Significantly on 24 February 1999 the formal agreement was entered into between the respondent, the bank, and the insurer, HIH Casualty & General Insurance Limited ("HIH"). What is of significance (as is established by the report of Bundesen and the annexures thereto) is that there was attached to that agreement a document headed "Credit Policy – Accountants' Fee Funding Program – Gold Ribbon (Accountants) Pty Ltd – Imposed by HIH" and another document headed "Self Imposed by GRA". The following is a relevant extract from the conditions "Imposed by HIH":

"Limit of $1,000,000 to each firm of accountants plus conditions precedent contained in Clause 4 of Accountants' Fee Funding Program:

(a) The Accountant must give to GRA immediate notice in writing of any change that occurs in the Accountant's entitlement to Receivables;

(b) The Accountant must supply to GRA a Certificate within 14 days of the end of each 90 day period;

...

(d) The Accountant must give to GRA immediate notice about any claim arising in relation to Receivables that are disputed ...

...

(f) The Accountant must at all times use care in the selection of competent employees ...

(g) GRA may carry out an audit of the Accountant's Receivables at any time;

(h) The Accountant, must, if operating as an incorporated entity, provide personal guarantees of its directors to GRA."

[19] The following are relevant extracts from the document headed "Self Imposed by GRA":

"(b) Registration by firm of Accountants pursuant to Form ‘A’;
(c) (i) GRA to carry out due diligence on applicant Accountant in accordance with Administrative Procedures and shall determine:
• Whether the documentation received is in order;
...
(ii) Where an Application does not satisfy criteria, GRA shall refer it to Directors with a recommendation to:
• Request further information from applicant, or
• Refuse Application.
...

(d) Upon Receipt of Application for Funding, GRA shall:

(i) Confirm applicant is registered under the Program and calculate maximum funding entitlement;

(ii) Approve the funding request where maximum funding entitlement is below $200,000;

...

(iii)Where the maximum funding entitlement is above $200,000, make a recommendation to a Director that the funding be approved. A Director shall be required to certify any approval of such a recommendation following careful examination of relevant documentation.

(e) Upon Receipt of an Application for Extension and Variation, GRA shall adopt procedures outlined in (d) above except in those instances where there has been a substantial change in the Applicant's Outstanding position from original application to date.
(f) In such instances GRA shall make a recommendation to a Director as to whether the funding should be approved, noting that in all cases two Directors shall be required to approve the funding where the maximum funding entitlement exceeds $200,000."

[20] The lending business conducted by the respondent effectively commenced in February 1999. As already noted, by then Austide had been appointed to administer the lending scheme, but the formal agreement between the respondent and Austide was not executed until 7 June 1999. However, it is reasonable to infer that from its appointment in late 1998 the terms of the arrangement between Austide and the respondent had been worked out and were identical to those ultimately contained in the formal agreement. The formal agreement between the respondent and Austide obliged the latter to carry out the duties "contained in the Summary of Administrative Procedures", and had the exclusive right to do so. Those duties had to be carried out "diligently, honestly and in a professional manner". The agreement provided for the remuneration of Austide, which was in broad terms on a commission basis.

[21] There was then annexed to that agreement a document headed "Summary of Administrative Procedures for the Management of the Accountant's Funding Program". Relevantly it provided:

"A. Registration

1. GRA receives application for registration from Accountant (Form A), and shall complete the following:

• Check that all relevant documentation is received and properly completed.
• Perform a due diligence assessment of the applicant. Such assessment shall involve but not be restricted to:
• ASC searches;
• CRAA searches;
• Any other relevant searches;
• Confirmation of membership(s) of professional organisation(s);
• Confirmation of currency of Professional Indemnity Insurance Policy.
2. In accordance with results of the ASC search, GRA shall check and verify guarantees provided by various parties ... GRA shall also verify that all relevant parties have provided guarantees.
3. GRA shall complete the Application Assessment Form and determine, in accordance with the credit policy, whether the application for registration is successful.
...
Rejected Applications
7. After consultation with a Director, GRA shall notify unsuccessful applicants in writing of rejection. Any subsequent enquiries from unsuccessful applicants shall be referred to a Director of GRA."

[22] There does not appear to be any direct evidence that the Bank and HIH saw a document such as that before the agreement of 24 February 1999 was signed, but the annexures to that agreement refer to "Administrative Procedures" and it is a reasonable inference that something along the lines of that document was revealed then to the Bank and HIH.

[23] Bundesen, in Appendix F to her report has prepared a table which helpfully compares the Austide Procedures as confirmed in the agreement between it and the respondent, with the procedures self imposed by the respondent and annexed to the agreement with the bank and HIH, and also with the procedures imposed by HIH and annexed to that agreement.

[24] To my mind that summary of undisputed evidence establishes two propositions. Firstly, though the appellant was not involved (as perhaps he ought to have been) in finalising the administrative arrangements with Austide, he may well not have required further detail to be inserted into the "Administrative Procedures". That is because there is for all practical purposes no difference between the administrative arrangements he and Romp worked out in April 1998 when it was believed CRM would be the administrator, and the procedures set out in the agreement between the respondent and Austide. The only significant difference is that the April 1998 draft required the applicant for a loan to provide "Financials last 2 years" where the loan was for more than $250,000. But if adequate due diligence was carried out in most instances that would require perusal of recent financial statements. The second matter which emerges is that the expression "due diligence" was a term clearly understood in the context by the Bank, HIH, and all the directors of the respondent. There can be no doubt that in the context in which the expression "due diligence" was being used it required a proper investigation of the proposed borrower's financial position with a view to ensuring that the proposed borrower had the capacity to repay the amount lent. If the expression did not mean at least that, it meant nothing. There can be no doubt that the use of the expression "due diligence" in the "Summary of Administrative Procedures" required Austide to undertake a close examination of the risks involved in the making of a particular loan, and satisfying itself that it would be prudent for the respondent to make the loan.

[25] The learned trial judge held that the case against the appellant was that he breached both his statutory and common law duties as a director in three respects, namely:

(i) failure to ensure that the scheme was set up so as to comply with "accepted lending practice";
(ii) failure to ensure that accepted lending practice was followed in the operation of the scheme;
(iii) failure to ensure that the scheme was administered by a person with the capacity to administer it properly.

[26] In paragraph [8] of the statement of claim it was alleged that it was an implied term of the agreement between the respondent and Austide that the latter "would conduct the administration of the program with the degree of care and skill that a person or entity in [Austide's] position would be expected to exercise when carrying out the administration of the program, being in accordance with accepted lending practice ("accepted lending practice")." That expression "accepted lending practice" was then particularised in the pleading as follows:

"accepted lending practice was the practice undertaken by professional lenders from in or about 1999 until 2001, being to undertake appropriate pre-lending due diligence which required the lender, before making a loan, to be firstly satisfied that the applicant, plus the asset base being funded, qualified for a loan under the terms of the facility; secondly, that the applicant had the financial capacity to both service the loan (in terms of making the required payments on the loan) plus repay the loan capital; and thirdly, that the requirements imposed on applicants by the terms of the loan application had been satisfied by the applicant."

[27] If it is correct to conclude, as I have, that the expression "due diligence" when used in the "Summary of Administrative Procedures" required the administrator to carefully evaluate the risks associated with the making of the loan, and to satisfy itself of the proposed borrower's capacity to meet its loan obligations, then there was substantial identity between the obligation imposed on Austide by the terms of its agreement with the respondent, and the concept of "accepted lending practice" referred to in the statement of claim.

[28] That also appears to be the conclusion reached by the learned trial judge in [57] of his reasons; there he said:

"Consequently, what was contemplated by the obligation imposed on Austide to perform a ‘due diligence assessment of the Applicant’ was not something purely formal and directed to showing that the applicant qualified for a loan and had completed the requisite forms. The required assessment also concerned the ability of the applicant to meet its obligations should a loan be made. In other words, it included a risk assessment."

[29] But significantly for his reasoning the learned trial judge went on to say in [58]:

"The scheme as devised failed to comply with accepted lending practice. The essence of the failure was not establishing a set of procedures under which the plaintiff would conduct enquiries and obtain evidence with a view to ensuring that loan applicants had the financial capacity to service the loan and repay loan capital. There was a failure to take measures to ensure that the certification of debts by the borrower was accurate in all relevant respects and that the debts actually existed. These deficiencies also existed in respect of loan increases and extensions."

[30] That resulted in a finding that the appellant "failed to ensure that the scheme was set up so as to comply with accepted lending practice." I understand those passages in the reasoning to be saying that in principle the "Summary of Administrative Procedures" required Austide to comply generally with accepted lending practice, but that there were no specific guidelines or set procedures in place which would ensure such practice was followed in each case.

[31] There is a finding in the judgment (at least with respect to the five loans in question) that Austide did not conduct appropriate due diligence enquiries and that directors of the respondent "had no expectation that it would do so". But that does not mean that the procedures specified in the "Summary of Administrative Procedures" failed to comply with accepted lending practice. If "accepted lending practice" required something more to be done than was encompassed by the term "due diligence" construed as stated above and the other requirements set out in the "Summary of Administrative Procedures", then that additional requirement had to be established by evidence.

[32] The respondent placed extensive evidence before the court from L M Bundesen, a forensic accountant. Her evidence referred to the various agreements, and to the five subject loans. In the course of his reasons the learned trial judge said that he did "not place much weight on Ms Bundesen's evidence as to what constitutes ‘accepted lending practice’." There was no other evidence on which a finding could be made as to any specific requirement which ought to have been included in the agreement between the respondent and Austide to ensure that "accepted lending practice" was complied with. If in finding that the scheme as set up failed to comply with accepted lending practice the learned trial judge was holding that there was some obligation which ought to have been imposed on Austide which went beyond what was encompassed by the expression "due diligence" as I have previously construed that expression, then there was simply no evidence to found such a conclusion. If, for example, "accepted lending practice" obliged a prudent lender to conduct some specific enquiry or follow some specific procedure then it was necessary for the evidence to establish that. The evidence led by the respondent failed to establish any such procedure or enquiry and no such specific finding was made by the learned trial judge.

[33] The evidence of Ms Bundesen, led by the respondent and admitted without objection, was to the effect that, if the program had been administered in accordance with the procedures agreed to between the respondent on the one hand and the Bank and HIH on the other, none of the five loans would have been made at all. The learned trial judge observed that such was no more than a finding of fact and did not involve any expression of expert opinion. But he did not reject the evidence entirely, and indeed it would have been wrong for him to do so. It was evidence led by the respondent from a forensic accountant in support of its case that the appellant was in breach of his duties as a director. Given that evidence, the case against the appellant had to be considered in the light of the fact that on the respondent's own admission the loans in question would not have been made if the procedures set out in the agreement between the respondent and Austide had been followed.

[34] The scheme as finally set up essentially complied with the administrative requirements that the appellant would have put in place if his company CRM was administering the scheme. The scheme as set up required the administrator to undertake appropriate due diligence before recommending that a loan be made and if that requirement had been followed no loan would be made to a borrower unless capacity to meet loan obligations was established. On the evidence the due diligence referred to in the procedure to be followed broadly equalled "accepted lending practice". The evidence did not establish any further specific procedure which should have been adopted. It follows in my view that the conclusion reached by the learned trial judge that the appellant "failed to ensure that the scheme was set up so as to comply with accepted lending practice" meant that there should have been additional safeguards in the "Summary of Administrative Procedures for the Management of the Accountants' Fee Funding Program" to ensure that in all cases the requirements thereof were strictly followed.

[35] In theory what was required to constitute "due diligence" would vary from case to case. Initial enquiry may reveal that particular searches should be carried out which would not be required in every case. Even the respondent's concept of "accepted lending practices" would be variable according to the particular circumstances. The evidence led by the respondent did not establish (and no finding was made) that a prudent director in the position of the appellant ought to have been aware that some particular enquiry not encompassed by the term "due diligence" ought to have been made with respect to one or more of the five loans or that some "set procedures" ought to have been put in place to ensure compliance by Austide with its obligation.

[36] The real issues then become, was there a failure on the part of the appellant to ensure that the scheme was administered by a person who had the capacity to administer it properly, or a failure on his part to ensure that "accepted lending practice", namely the carrying out of appropriate "due diligence" was followed in carrying out the scheme so that the losses in issue were incurred. Those questions must ultimately be addressed with respect to each of the five loans in question.

[37] The learned trial judge appears to have concluded that Austide, through its employees, had the capacity to administer the scheme properly, but in fact they failed to do so. Relevantly on the issue whether the scheme was administered by a person who had the capacity to administer it properly the learned trial judge made the following findings:

"Ms Schweitzer had 16 years experience with Custom Credit Corporation, including experience as a loans assessor and a relieving branch manager. She had also spent 10 years in administration at a private hospital and in managing a medical day procedure centre. Her former husband, Ronald Schweitzer, who was employed by Austide at relevant times, had also worked in reasonably senior positions at Custom Credit. Prior to the making of loans under the scheme Ms Schweitzer had extensive dealings with the directors, particularly Mr Taylor. She discussed the proposed administrative procedures with Mr Taylor who formed a favourable view of her competence. That view did not change as the scheme commenced to be implemented. None of the other directors, apart from Mr Dunn, had reservations about Ms Schweitzer's abilities and expertise. . . .

Ms Schweitzer's background appeared adequate to enable her to perform her duties, particularly when regard is had to the fact that Austide also employed Mr Ronald Schweitzer. No doubt was cast upon her general administrative efficiency or the efficiency of any employee of Austide."

[38] The appellant's assessment of Ms Schweitzer was coloured by his reaction to CRM being replaced as the prospective administrator of the lending program. The appellant's evidence, given with hindsight, was essentially to the effect that Ms Schweitzer was more than qualified to administer the scheme; in consequence little weight should be attached to the trial judge's observation that the appellant had at earlier points in time experienced reservations about Ms Schweitzer's abilities and expertise.

[39] Notwithstanding those findings as to the competency of the Schweitzers the learned trial judge concluded that the appellant failed to ensure that the scheme was administered by a person who had the capacity to administer it properly. Essentially he did so for the following reasons:

"Although Ms Schweitzer and Mr Ronald Schweitzer appeared sufficiently qualified to administer the scheme, the inadequacy of their administration, as earlier discussed, revealed their lack of competence. If appropriate administrative procedures had been devised from the outset, Austide and Ms Schweitzer were capable of carrying them out. Ms Schweitzer and her company, however, did not prove capable of devising and establishing such procedures.
. . .
The fact that Ms Schweitzer, working with apparent industry, succeeded in devising manifestly deficient procedures suggests that a director exercising appropriate care, in ensuring that a safe lending scheme was put in place and carried out, may well have detected her and Austide's failings.

Mr Dunn, with his experience and knowledge of what was originally contemplated probably would have detected Mr Taylor's and Austide's inability to establish sound procedures had he involved himself in its affairs. On balance, I find that this allegation has been made out, but it does not appear to me that the finding is central to the question of liability. The real issues are whether proper loan administration procedures were put in place and implemented, whether, if they were not, Mr Dunn bears responsibility in that regard or whether he was entitled to rely on others."

[40] The reference in the first sentence of that quote to the "inadequacy of their administration" appears to be a reference back to the finding in [57] that: "Austide did not conduct due diligence enquiries of this nature and the directors of the plaintiff who had contact with Ms Schweitzer concerning the administration of the scheme had no expectation that it would do so", and the findings in [61]. Those findings were made before the learned trial judge considered the actual steps taken by Austide prior to the making of the five loans in question.

[41] There is a deal of evidence (though the learned trial judge did not make any findings in relation to it) which strongly suggests that the appellant and probably Romp at least were not aware of the business and personal relationships between Ms Schweitzer, Sheers and Howes. At least it can be said that the respondent did not prove that at the material time the appellant was aware of the business links between Howes and Sheers and the borrowers, or of the fact Sheers was a director of Jumarsh and had an interest in Austide, or perhaps of the personal relationship between Sheers and Ms Schweitzer.

[42] The learned trial judge made findings in [61] which led to his conclusion that in administering the scheme Austide failed to follow "accepted lending practice" as defined in the statement of claim. He found that Austide "conducted no due diligence enquiries with a view to satisfying itself that the applicant had the financial capacity to service and repay the loan. Nor did Austide seek independent proof, or some other means of verification, of the debts certified in the application for the loan." He then went on to conclude that: "Generally speaking, it did no more than what was required to process the application forms settled by Ms Schweitzer in conjunction with representatives of the plaintiff."

[43] The findings are stated in general terms, and it is not clear whether the learned trial judge was limiting his finding to the five loans in question. If the finding was broader then it is not clear what evidence it was based on. Significantly, the learned trial judge did not consider the evidence in relation to those five loans until later in his judgment. There was some, but mostly non-specific, evidence as to Austide's administration generally, and that evidence would not justify a finding that "accepted lending practice" was not followed or that appropriate due diligence was not conducted generally. Such a conclusion had to be based on a consideration of the files in relation to the five loans.

[44] It is now necessary to turn to each of the five relevant loans and to consider the circumstances in which the loans came to be made in some detail.

Loan to Jumarsh

[45] The learned trial judge made the following relevant findings. At the time of making the advances the directors of the company were Julian Norton-Smith and Sheers. The loan form showed the applicant to be Julian Norton-Smith trading as Jumarsh Pty Ltd, but in another part of the form the "authorised person" was said to be Michael Norton-Smith and Julian Norton-Smith. Michael Norton-Smith was a certified practising accountant and it was his professional membership which was relied on to obtain the loan. He was a bankrupt at the material time. The learned trial judge stated: "It would seem that no credit check was done on him, or, if it was, it was not acted upon." Finally with respect to this loan the learned trial judge made the following findings:

"The purpose of Jumarsh in borrowing the subject monies was to re-lend them to persons and companies, including Mr Howes, and companies in which Mr Sheers had an interest. Mr Sheers witnessed Julian Norton-Smith's signature on the original loan application and I infer that Mr Sheers and Mr Howes were aware of the purpose for which Jumarsh was borrowing the subject money. I infer also that Mr Sheers was aware that Julian Norton-Smith's certification of receivables bore little, if any, relation to reality."

[46] The Jumarsh loan file (as was the case with the other relevant loans) was put in evidence as part of the respondent's case. Nothing in the documentation was challenged and in consequence on appeal regard can be had to the contents of the file on the basis that it was uncontradicted and put forward by the respondent in order to prove its case.

[47] Before proceeding to consider the files it should be noted that Ms Schweitzer was initially the third defendant in the proceedings, but a notice of discontinuance was filed prior to the trial, which proceeded only against the appellant. The respondent subpoenaed Ms Schweitzer to give evidence at the trial, but at the last moment informed her that she need not attend. The relevant files contain many abbreviated notes, apparently in Ms Schweitzer's hand, and the failure of the respondent to call her deprived the court of the benefit of her evidence in relation to such matters. Certainly one can draw the inference from the fact that the respondent sent her away that she could not strengthen the respondent's case.

[48] The initial Jumarsh application form gives Jumarsh Pty Ltd as the trading name and the applicant's name as Julian Richard Norton-Smith. Later the name of the "authorised person" is given as Michael Richard Norton-Smith and Julian Norton-Smith. That application form dated 22 February 1999 is witnessed by Sheers. There was an accompanying declaration as to health with respect to Michael Richard Norton-Smith and again that document was witnessed by Sheers. The file includes reports from CRAA on both Jumarsh and Julian Norton-Smith. A copy of the practising certificate of Michael Richard Norton-Smith as a Certified Practising Accountant is also on the file. On the basis of total receivables of $428,100 a loan of $342,000 was approved on 12 March 1999. There is then a memo from Ms Schweitzer to Taylor of 22 March 1999 indicating that she did not have an authorisation signature on the application for Jumarsh; the memo went on: "I have attached the assessment form completed on 19/2/99 and would appreciate it if you would have Steven [Romp] authorise it." Taylor returned the form to her on 23 March 1999 duly signed by Romp. The advance of a further $100,000 in July 1999 was approved by Howes. Again the borrower's forms with respect to that further advance were witnessed by Sheers. The further advance in September also appears to have been approved by Howes. Romp wrote to Ms Schweitzer on 29 October 1999 raising some issues with respect to the Jumarsh loan. The following is a relevant extract from that letter:

"In respect of Professional Indemnity insurance for above please advise, if Jumarsh Pty Ltd is a registered accounting practice and a member of which professional body.
. . .
Also, please confirm that the directors of Jumarsh Pty Ltd are accountants and what are their qualifications and how long have they been practising in this practice and in any previous practice.

Until these questions are answered no more advances or extensions of advances are to be approved."

[49] That elicited a reply from Ms Schweitzer in the form of a letter to Romp dated 3 November 1999. Relevantly that letter stated:

"Jumarsh Pty Ltd, is an Administration Company for the Norton-Smith Family Trust. Michael Norton-Smith is a beneficiary under that Trust and is the sole practising practitioner. He is not a Director of the Company, as he is presently under a disability.

I refer you to the attached Assessment Form sent to you at the time of the application for your approval of the loan. As can be seen, you were advised at the time that Mr Norton-Smith was not a Director of the Company and that he was working as a Consultant to Ingles & Partners. Mr Norton-Smith's son Julian signed the Guarantee as the sole director of the company.

I would also like to confirm that the other requirements listed on the Assessment Form, were completed prior to advancing the funds.
. . .
Please also note that all subsequent increase of advances have been approved by a GRA Director - Mr Garry Howes - copies of Approvals and Authorisations are attached."

[50] That letter also suggested that the Jumarsh file would be brought to the attention of the board of the respondent at the next meeting.

[51] There is a copy of an ASIC search with respect to Jumarsh on the file, but it would appear that it was obtained well after the loan was initially made. That form discloses that Michael Richard Norton-Smith was a director of Jumarsh from 28 June 1996 until 21 August 1998. One could infer that it was on the latter date that he became bankrupt. From then Julian Norton-Smith became a director. Sheers became a director on 16 February 1999 and remained as such until 1 November 1999.

[52] Thus it can be said that Sheers, who was found by the judge to have been one of the promoters of the "Accountants' Fee Funding Program" from the middle of 1997, became a director of Jumarsh some six days before the application for a loan was submitted and he witnessed all documents associated with the loan application. He then became a director of the respondent on 28 June 1999 which was before each of the additional advances were made to Jumarsh.

[53] One sees a detailed summary of the relationship between Jumarsh, the Norton-Smiths, and Sheers in the reasons for judgment of McMurdo J in ASIC v Sheers [2003] QSC 474; the evidence in this case supports the findings made in that decision. In that proceeding it was held that, by his involvement in the making of the further advances to Jumarsh, Sheers contravened s 182 of the Corporations Act 2001 (Cth) and he was in consequence disqualified from managing a corporation for a period of two years. It is relevant for present purposes to note that of the initial advance of $342,000, Jumarsh paid $200,000 to Sheers by cheque dated 15 March 1999, that is three days after the loan was made. That was undoubtedly because of the various business ventures which had been entered into between the Norton-Smiths and Sheers, particularly what was referred to as the Timber Tec venture. The further advance in September also ultimately benefited both Sheers and Howes. The affidavit of R A Duus (including exhibits) largely supports all these conclusions.

[54] There is no doubt that Sheers benefited substantially from the loans made to Jumarsh, as also did Howes, but probably to a lesser extent. It is not irrelevant to recall at this stage that Ms Schweitzer was the de facto partner of Sheers. The critical questions are whether or not Austide carried out a proper due diligence with respect to Jumarsh, and if not, why not? Clearly there was major involvement of directors of the respondent in the approving of the initial loan and the further advances. Romp formally approved the initial application, and the subsequent further advances were approved by Howes. Taylor, though not then a director, was involved with the original application, and Sheers was a director at the time of the approval of the further advances. Given that Sheers had witnessed the applicant's signature on the original application the directors of the respondent would have been immediately aware that he had particular knowledge of the applicant. The direct involvement of Sheers in both the lender and the borrower, and the fact that he benefited significantly from the loan, put the approval of this loan into a special category. There is nothing in the file to indicate that at the initial stage Austide was actually aware that Michael Richard Norton-Smith was a bankrupt, but it is clear that at some stage Ms Schweitzer became aware of that because she refers in the subsequent letter to his "disability".

[55] The inescapable conclusion is that the initial loan to Jumarsh, and the further advances, were made because Sheers and Howes stood to benefit from the loan. If the procedures set out in the "Summary of Administrative Procedures for the Management of the Accountants' Fee Funding Program", including conducting due diligence with respect to the applicant, had been carried out the initial loan and further advances would not have been made. But those procedures were bypassed because of the involvement of directors of the respondent.

[56] The relevant question for purposes of the present proceeding then becomes, was there, in those circumstances, a failure on the part of the appellant to ensure that accepted lending practice was followed and which resulted in the loss. That is a matter to which I will return after considering the other relevant loans.

Loan to Venola

[57] At the outset it should be noted that the learned trial judge found that there appeared to be "a close connection between Venola, Spiller and Mr McCouat." Loane was the director of Venola and the learned trial judge also found that there was evidence "that Mr Sheers was an acquaintance of Spiller, Mr McCouat and Mr Loane and that he had had some form of business dealings with them."

[58] The learned trial judge made a finding that the initial loan application by Venola was "approved by Mr Howes". He also found that "Venola was not carrying on an accounting practice at any material time". Loane, as director of Venola, did not put forward any evidence as to his membership of any relevant professional accounting body.

[59] The learned trial judge made no further specific findings with the loan to Venola, but again consideration of the relevant file is instructive.

[60] The file discloses that a reference from CRAA was obtained with respect to Venola. There was also an ASIC search done on the company. The application form indicated that Venola was part of the "Capital Assets Group". That form also made it clear the applicant was not a registered tax agent; the following information was provided: "Work in association with tax agent - we are management accountants and corporate advisers". Significantly on the assessment form, which was signed by Howes indicating the loan was approved, it was stated: "Known to Ric Sheers".

[61] There is a file note dated 10 December 1999 indicating that Howes and Sheers would try and make contact with the client; it would appear by then there may have been some problem with the account. There is another diary note for 15 February 2000 (the handwriting was not identified in the evidence) to the effect that Howes was advised that further forms were due with respect to a rollover of the loan. The note went on: "Client's file now being handled by him". Another file note on 29 May 2000 suggests a link between Venola, Ryland (the principal of Spiller) and McCouat. Subsequent diary notes suggest that Howes and Sheers were involved in attempting to resolve problems with Venola and Spiller accounts.

[62] In November Venola sought an increase in funding to make the total loan $1,000,000. Schweitzer replied by facsimile of 25 November 1999 as follows:

"I refer to your application for Variation and Extension to your funding with our program, and advise that the application has been referred to two Directors of the Company.

Before they will consider any further increase in funding, they have requested that you supply to them, a full list of your aged debtors as per your statement."

[63] That would indicate Ms Schweitzer, at least on that occasion, was following the procedures laid down in the various protocols. In the following month Venola defaulted in making a monthly interest payment and as Ms Schweitzer advised Venola she had "no option but to refer the matter to a Director of the Company, Mr Gary Howes." Again an indication of appropriate management of the account on the part of Ms Schweitzer and Austide.

[64] Also on the Venola file is an ASIC search of Capital Asset Holdings Ltd; it may well have been initially obtained in April 2000. Relevantly for present purposes it established that Ryland, McCouat and Loane were associated with that company. Other documents on the file carry the suggestion that the loan to Venola and Spiller was on behalf of the Capital Assets Group. That appears to be confirmed by the guarantee given by Ms Caerdinel (Loane's wife) who had replaced him as a director of Venola; that guarantee is dated 15 August 2000. There are other documents on the file which also confirm a relationship between Ryland and Venola.

[65] There are diary notes on the file for January 2001 which may be of significance if they were more fully explained. For example there is a note that Ryland claimed that he had given Sheers $50,000 "part of which was to bring this account [Venola] up to date."

[66] Finally on the Venola file there is a typed file note, unsigned, to the following effect:

"RTS advised that he has entered into a contract on Clarkes Cove Property - valuation $15 million in order to raise finance to pay out both the first mortgage approximately $4 million and capital and outstanding interest payments on GRA debtor accounts above.

File handed over to Directors of the Company and Board advised of security held.

This client is in partnership with other GRA clients - Spiller Holdings and J McCouat on this project."

[67] RTS is clearly a reference to Sheers. Later on in other files there is also reference to the Clarkes Cove project, but there is little if anything in the evidence to establish who was involved in it and what loan funds from the respondent were involved.

[68] Again this would appear to be a loan which was formally approved of by Howes and in which at all material times Sheers was heavily involved. If only because neither Venola or Loane were practising accountants, the loan would never have been made if the procedures laid down in the relevant protocols were followed. The inescapable conclusion is that the loan was only made because of the involvement of Sheers and Howes with Venola. It follows that the remaining relevant consideration for purposes of this proceeding is whether the appellant failed to ensure that "accepted lending practice" was followed in relation to the loan to Venola and which resulted in the loss.

Loan to Spiller

[69] The learned trial judge found that the initial loan application was dated 28 May 1999. The application form described the applicant as "David Ryland, trading as Spiller Holdings Pty Ltd Manly Business Services". Ryland was the sole director of Spiller. The learned trial judge merely held that the "application was approved by Mr Sheers". He also found that Austide did not obtain a search of the name "Manly Business Services". He also found that it did not appear that Spiller carried on any accountancy practice.

[70] Again, reference to the file documents discloses further relevant information. The application form asserted membership of the Institute of Chartered Accountants and that Ryland was a registered tax agent. A Certificate of Registration of Tax Agent is on the file and also a certificate establishing as at 1981 that Ryland was a member of the Institute of Chartered Accountants.

[71] Significantly it would appear that Sheers approved of the loan on 1 June 1999; that appears from the Assessment Form. That approval was given some weeks before Sheers became a director of the respondent on 28 June. The comment on the assessment form indicates that due diligence was carried out in the name of Manly Business Services though the loan was to be to Spiller. It indicated that the business name search had been carried out as well as an ASIC and CRAA search. The final further advance of $276,000 in February 2000 was approved by Howes, but it is difficult to decipher signatures approving the earlier additional advances.

[72] There is an interesting document on file, being a letter from Manly Business Services signed by Ryland of 21 December 1999 to Howes. It is in the following terms:

"Following my discussions with Rick Sheers this afternoon I have agreed to meet both Venola Pty Ltd and Spiller Holdings Pty Ltd monthly drawdowns until at least April 2000 drawdowns. Please therefore deduct the amount for Venola as agreed. You have my banking details. If you require an additional authority please advise."

[73] There is then another copy of that document on the file with a handwritten notation on it; again it might be Ryland's signature but one cannot be sure of that. The handwritten notation is in these terms:

"Please stop trying to deduct Venola's payment from Spiller Holdings account. Contact John McCouat as he has the money to pay for it."

[74] Further evidence of the close relationship between Ryland and McCouat is seen in the letter of 30 June 2000 from Ryland to the respondent signed in the presence of McCouat as a witness. That document relates to the guarantee given by Ryland. The guarantee itself, dated 30 June 2000, is also witnessed by McCouat. There is then a diary note signed by Ms Schweitzer but undated dealing with default with respect to this loan; it is in these terms:

"Ron [Schweitzer] spoke to David Ryland on the 19^th October and he requested that Rick Sheers talk to him with regard to another GRA client that Ryland is involved with – Venola Pty Ltd. This client's account is currently under the management of Gary Howes and Rick Sheers.

Sherie advised Rick Sheers on 20^th October of the above comments and handed the file over to him and Gary Howes on 24 October for further action.

30/10/2000 advised by both directors that they were having difficulties in contacting the client. ...

Rick and Gary both made contact with the client and I was told to draw back one payment from GRC's account. Client apparently could come up with half of a payment until the property settlement is complete."

[75] Then comes a very interesting letter from David Ryland dated 15 December 2000. It is addressed to:

"Mr Rick Sheers
Director
Timber Tec Holdings Pty Ltd and
Gold Ribbon Corporate Services Pty Ltd"

The letter is headed "Outstanding Gold Ribbon Facilities" and then is in these terms:

"I refer to Elliot & Harvey's letter of 14 December 2000 in respect of the settlement of the Pacific Sands Motel and your Group's contracting to purchase Clarkes Cove.

The Clarkes Cove sale contract provides for full clearance of current debts to Gold Ribbon in the names of Spiller Holdings Pty Ltd, Venola Pty Ltd and John McCouat at your request.

As discussed I confirm that upon settlement of Pacific Sands Motel set down for Thursday 21 December 2000, that all arrears interest payments in respect to Spiller Holdings Pty Ltd and Venola Pty Ltd will be brought up to date and prepaid to 30 March 2000."

It will be recalled that on the Venola file there was also reference to Clarkes Cove.

[76] The next relevant document on file is a letter from Ryland addressed to Ms Schweitzer of 25 January 2001 in relation to the Spiller loan; the relevant text is as follows:

"Prior to Christmas a transaction was completed via Rick Sheers of your office wherein your Group was given the benefit of $50,000 in relation to matters clearing both the principal and interest owing from my company and associated entities to Gold Ribbon. In addition a further $20,000 was drawn in favour of Gold Ribbon Accountants Pty Ltd and handed over at settlement on the 22^nd of December 2000. This money should have been allocated directly towards Spiller Holdings facilities.

In all a total of $70,000 has been paid as per the direction of Gold Ribbon's director – Mr Sheers. This is more than adequate. Your Group has undertaken via other dealings to have the limits of Spiller Holdings Pty Ltd, Venola Pty Ltd and John McCouat cleared by the 30^th of March 2001. I believe Mr McCouat is already covering his own interest and will continue to do so until the 30^th of March 2001. The money that I have paid, more than covers my limit until that date. I am more than happy for any excess amounts to be allocated towards Venola Pty Ltd's service ability to that date.

We have requested, but have yet to receive, a full reconciliation of the outstanding position of Spiller Holdings Pty Ltd, Venola Pty Ltd in respect to interest payments due and payable to 30 March 2001. We continue to wait for your reconciliation and confirmation of this position.

It is obvious that you have misallocated the money paid to your company at settlement on 22 December 2000. Could you kindly amend your records to show Spiller Holdings Pty Ltd's payment of the above amounts."

[77] Ms Schweitzer replied by facsimile the same day; relevantly she said:

"I have spoken to Rick Sheers about your letter, who advises me that during the transactions that took place prior to Christmas, the only communication Rick Sheers received from you is a fax dated 15 December 2000. ... All other arrangements including the dispersion of the $20,000 paid on 22 December 2000 were coordinated by your associate Mr Darryl Loane. The only communication that this office has had with you during that time, was a phone conversation with Ron Schweitzer regarding your overdue payments. ...

Mr Sheers advised me that you were well aware that the $50,000 as stated in your letter, was being used as part deposit on the purchase of Clarkes Cove. He further stated that all documentation pertaining to that settlement would show this to be the true fact. That money therefore, was never received by Gold Ribbon Accountants Pty Ltd.

I take exception to the comments you make in your last paragraph and I shall be tabling all correspondence at next weeks Board meeting at Gold Ribbon ..."

[78] Unfortunately the material on the file, and the other evidence contained in the 18 volumes of appeal record, does not appear to clarify what was the relationship between Sheers, Howes, Loane, Venola, Spiller, Ryland and McCouat with respect to ventures such as Clarkes Cove. It is unclear what the settlements are that are referred to in the documents just quoted.

[79] The files with respect to Venola and Spiller would tend to suggest that once the loans were in default appropriate steps were taken by Ms Schweitzer and Ron Schweitzer to remedy the situation and to ensure that Board members of the respondent were fully appraised of the situation.

[80] One is left with the clear impression that the Spiller transactions were only entered into because of the association between Sheers and Howes on the one hand and the borrower on the other.

[81] Again, the question for purposes of this proceeding is whether the appellant failed to ensure that the protocols governing the making of such loans were followed which resulted in the loss.

Loan to Moss

[82] In relation to this loan the learned trial judge made the finding that Moss failed to complete "the part of the form which made provision for identification of particulars of the borrower's professional indemnity insurance." He also found that Howes witnessed the signature of Moss on the form and Howes also approved the application. Significantly a further finding was made: "Howes was aware that false information was being submitted and he and Sheers stood to benefit indirectly from, at least, the initial advance." Then there was a finding as follows:

"The CRAA search obtained by Austide showed that Mr Moss had become self-employed as an Accountant on 14 October 1999, three days after he signed the application form. It may be inferred from these facts that the fees certified by Mr Moss were highly unlikely to have existed. At the very least, this fact suggested that a careful investigation of the applicant's certificate was warranted. There was no such investigation."

[83] Handwritten file notes which form part of the file with respect to Moss, strongly suggest that Howes was very involved in all dealings with Moss.

[84] The file reveals that extensive credit enquiries were made with respect to Moss, and indeed by letter of 12 October 1999 he gave an explanation with respect to two matters revealed by those enquiries which could be regarded as adverse.

[85] As found by the learned trial judge the initial application form submitted by Moss was very deficient in particulars, yet it was witnessed by Howes and then approved by him. Signatures approving extensions of the loan in March and April 2000 are difficult to decipher, but it is of some significance that the application for an extension of loan dated 12 July 2000 is witnessed by Howes.

[86] Solicitors for the respondent wrote to Moss on 29 May 2001 asserting that $735,000 was outstanding in respect of his loan. Moss replied by an email of 27 June 2001 as follows:

"While I do agree that I do have a loan from your client for $735,000, I wish to point out to you the fact that this loan was obtained due to representations made to me by Directors of Gold Ribbon (Accountants) Pty Ltd. A substantial amount of the loan was used to fund several companies of which these Directors were shareholders and officeholders. In simple terms the Directors used me as a vehicle to obtain funding for their own purposes. I did not approach the company for a loan at any stage.

I have in my possession a signed written agreement by Gary Howes, Rick Sheers and Michael Norton-Smith that names them as being guarantors for my loan with Gold Ribbon. Also their involvement in the abovenamed companies is a matter of public record with the ASIC statutory records in addition to the other relevant documents. There are also other witnesses to these facts.

If you wish to pursue me in this regard to this loan then I will have no choice but to take appropriate action against the abovenamed.

I suggest that in the first instance you contact Gary Howes to verify the claims made by me. If you wish to contact me then please do so by return mail. No doubt that it would be in the interests of all parties that this matter be dealt with in a sensitive and sensible manner."

[87] The file does not reveal any response from the respondent to the allegations contained in that document.

[88] McMurdo J also recorded findings with respect to the Moss loan in ASIC v Sheers referred to above. Findings were there made that the falsified statements as to the receivables of Moss were "planned by Mr Howes". There was also a finding that "some of the monies lent to Mr Moss were to benefit entities in which Mr Sheers had an interest"; as was said therein: "... according to the affidavit of Mr Moss, whose evidence was not challenged by cross-examination and which I accept, a substantial part of the initial borrowing of $343,380.80 from GRA was used to pay companies in which Mr Sheers had an interest or the expenses of other shareholders in those companies." It is also not irrelevant to note in this context the finding in that decision with respect to the companies Cable Drum Pty Ltd and Innovation Design Marketing (International) Pty Ltd; it was found that 50 per cent of the shares in those companies was held by a consortium of Moss, Howes, Sheers and Michael Norton-Smith. There was also a link to the company Timber Tec Holdings Pty Ltd. All these findings are supported by evidence in this case.

[89] Reference should also be made to the findings of fact and conclusion by Dutney J in ASIC v Howes [2003] QSC 270. In that proceeding it was held that, by his involvement in the making of advances to Moss, Howes contravened s 182 of the Corporations Act 2001, and he was in consequence disqualified from managing a corporation for a period of five years. There were findings in that case that Moss was "approached by Mr Howes to invest start-up capital in a number of ventures. Mr Howes advised him that the capital could be obtained from GRA. Two of the companies involved were Cable Drum Pty Ltd and Innovation Design Pty Ltd. In return for providing start-up capital Mr Moss received shares in each company. Mr Howes also took a shareholding through a family trust, the trustee of which was a company owned by Mr Moss." There was also a finding that Howes "created a fictitious debtor's list for Mr Moss. Mr Moss had never had debtors even approaching the figure of $900,000 at any point in his entire accounting career. Mr Moss transposed Mr Howes' fictitious debtors list on to a loan application form." There was also a finding that because Moss was concerned as to his liability he received a "cross-guarantee from ... Howes and [Sheers] to protect him against" such liability. Again all these findings are supported by evidence in this case.

[90] The conclusion is inescapable that the loan to Moss was only approved and made because of the direct involvement of Howes and Sheers in the transaction in the fact that each of them stood to benefit from the making of the loan.

[91] For present purposes the question is whether the appellant failed to ensure that the protocols governing the making of such loans were followed which resulted in the loss.

Loan to McCouat

[92] The learned trial judge found that McCouat's application was approved by Sheers. He noted that the "practice address" given was that of "Manly Business Services". Loane witnessed the signature of McCouat on the application form. There was also a finding that "McCouat did not have receivables certified in his application or in any of the applications for further loans or further extensions of loans." The judgment recorded that McCouat had obtained membership of the National Institute of Accountants and taken out professional insurance only at about the time of making the loan application, yet the application listed outstanding practice debtors of $1,707,023. As the trial judge said: "[t]hese matters ought to have suggested that the facts certified by the applicant be investigated carefully. There was no such investigation."

[93] There is a document on the McCouat file headed "file note" which contains some typewritten and some handwritten notations. There is an undated handwritten note at the foot of that page in the following terms:

"RTS [Sheers] has entered into a contract on Clarkes Cove property valued at $15 million in order to raise funds to payout the first mortgagee ($4 million) and o/s capital and interest on GRA debtor accounts. Spiller/Venola and McCouat (all previous partners in Clarkes Cove)."

[94] Clearly some due diligence was carried out because on the assessment form it is noted that the CRAA report "shows one default but since paid". There is on the file a letter dated 4 April 2000 establishing that McCouat was admitted to membership of the National Institute of Accountants on 3 April 2000.

[95] Ms Schweitzer wrote to McCouat on 21 February 2001 in the following terms:

"Over the past few weeks, we have had indications from you that you are expecting your current facility with Gold Ribbon Accountants Pty Ltd to be paid out on the 31^st March, 2001. Further, it is evident that pending this settlement you believe that your current terms and conditions with us do not need to be adhered to.

Please note that any arrangements that you may have with Mr Rick Sheers for the anticipated settlement of this account should not affect in any way, how you are required to maintain your facility with Gold Ribbon Accountants."

[96] As the account had not been settled by 11 April 2001 Ms Schweitzer wrote threatening immediate commencement of legal action. That brought a reply from McCouat in the following terms:

"In reply to your correspondence of 11 April 2001 I would like to point out information returned to Mr R Taylor and Mr R Schweitzer in previous correspondence sent to your company. Accordingly could you please refer this matter to Mr Rick Sheers, and also to provide me with a balance of account to 30 March 2001."

[97] All of that material, put in by the respondent, strongly suggests an involvement by Sheers, and probably Howes, with respect to this loan, but the respondent has not provided any more detailed information as to the background transactions.

[98] On the evidence presented to the court by the respondent the inference is compelling that again it was Sheers and Howes who were instrumental in ensuring that this loan was made to McCouat. The inference is that that was influenced by the business dealings that Sheers and Howes were involved in with Spiller, Venola, Moss and McCouat.

[99] The remaining question is whether the appellant failed to ensure that the protocols were followed in relation to the making of this loan which resulted in the loss.

[100] Finally, in dealing with the five loans in question some further findings by the learned trial judge should be noted. Initially he concluded that there appeared to have been "a close connection between Venola, Spiller and Mr McCouat" and that there was "evidence also that Mr Sheers was an acquaintance of Spiller, Mr McCouat and Mr Loane and that he had some form of business dealings with them". There was then a finding as noted above in [45] that the purpose of the Jumarsh loan was to on-loan the borrowed funds to entities in which Howes and Sheers had an interest. Finally, the learned trial judge found as recorded in [82] that Howes and Sheers stood to benefit from at least the initial advance to Moss. Those findings are more than amply supported by evidence placed before the court by the respondent.

[101] But then his Honour went on and made a finding that the "evidence though does not support the conclusion that Messrs Sheers or Howes stood to gain financially from the loans to Venola, Spiller, Moss or McCouat". Given the material placed before the court by the respondent, much of which has been summarised above, that finding cannot stand. Even if the evidence does not enable the court to make findings as to how Sheers and Howes specifically benefited from the making of those loans, the material placed before the court by the respondent clearly establishes the inescapable conclusion that in some way they were to benefit materially. The finding by the trial judge is so contrary to the evidence that this Court should set it aside.

[102] Against the background of all that has been set out in these reasons the conclusion is inescapable that Howes and Sheers were prepared to take whatever steps were necessary in order to ensure that the loans were made to each of the five borrowers in question, regardless of what was contained in the protocols governing eligibility for the making of such loans. Despite conflict of interest each was prepared to exercise the power of approving a loan even in the face of documentation indicating that such a loan fell outside applicable guidelines. In relation to the Jumarsh loan Sheers was a director of that company, the person whose signature appeared on the application form as witness, at the time of the initial advance a promoter of the respondent, a person with an interest in Austide, and the de facto partner of Ms Schweitzer who was the person primarily responsible for carrying out due diligence. At least some of the monies lent to Jumarsh were on-lent to Howes and Sheers or entities in which they had an interest. The further advances to Jumarsh were approved by Howes. Sheers was a witness to the applications for further advances. In those circumstances it is improbable, if not fanciful, to conclude that any specific direction given or conditions imposed by the appellant as to the procedural steps to be taken to ensure that due diligence was carried out, or accepted lending practice followed, would have deterred Howes and Sheers from having the loan approved and made.

[103] Without again re-stating the position with respect to the approval of loans to Venola, Spiller, Moss and McCouat the same conclusion must be reached. In each case a director of the respondent approved the loan notwithstanding that it failed to meet the guidelines set for approving loans. Further, in many instances it was obvious to anyone approving the application that false information was being provided. Notwithstanding conflict of interest, because of the association between Howes and Sheers on the one hand and the borrower and those ultimately to benefit from the loan on the other, the loans were approved. Again it would be improbable, if not fanciful, to conclude that any direction given or condition imposed by the appellant as to the procedural steps to be taken to ensure that due diligence was carried out, or accepted lending practice followed, would have deterred the directors in question from approving the loans.

[104] For present purposes it can be accepted that Austide conducted inadequate due diligence with respect to each of the five loan applications. The findings of the trial judge can be accepted that with respect to those five loans it did not seek independent verification of the receivables and did not satisfy itself that the applicant had the financial capacity to service the loan.

[105] It is important to note that it was not part of the respondent's case as pleaded or presented that the appellant was in breach of his duties as a director in not taking steps to prevent his co-directors from breaching their duties as directors and acting, despite conflict of interest, in approving the loans.

[106] There is nothing I wish to add to what Keane JA has said in his reasons as to the nature of the duty owed by a director in the circumstances in which the appellant was placed here.

[107] The ultimate question then is one of causation. Did the respondent prove that the losses in question were incurred because the appellant breached his duty as a director in that he failed to ensure that accepted lending practice was followed? That question can only be answered after consideration of the appropriate test for causation in such circumstances.

[108] In March v E & M H Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506 the majority of the High Court held that causation is essentially a question of fact to be answered by reference to common sense and experience. But all of the judges were of the view that the "but for" test was at least a useful and relevant aid in determining whether something is an effective cause of something else. As Deane J said at 522, citing Duyvelshaff v Cathcart & Ritchie Ltd (1973) 47 ALJR 410: "In particular, the test [the 'but for' test] will commonly exclude causation for the purposes of the law of negligence if the answer to the question it poses is that the accident which caused the injuries would have occurred in the same way and with the same consequences in any event." That reflects what was said by Mason CJ in March at 515: ". . . the 'but for' test, applied as a negative criterion of causation, has an important role to play in the resolution of the question [of causation]."

[109] What the learned trial judge in this case relevantly held was that:

"The inadequate loan application procedures and the general lack of rigour applied in assessing applications greatly enhanced the likelihood that bogus or unmeritorious applications would be approved. Whilst the adoption of procedures which conformed with 'accepted lending practice' may not have ensured that all such applications were detected, the prospects of detection, and deterrence, would have been substantially enhanced. "

[110] That appears to be largely based on a passage in the judgment of McHugh J in Chappel v Hart (1998) 195 CLR 232 at 244-5, but to my mind it overlooks the significance of the "but for" test as "a negative criterion of causation", to use the words of Mason CJ. The learned trial judge did, however, adopt to some extent that approach in [138] and [139], where he said:

"The remaining argument on causation is that the five defaulting loans were made as a consequence of the fraudulent or improper activities between the borrowers on the one hand and Messrs Sheers and Howes on the other. It is said that even if there were some breach of duty on Mr Dunn's part it cannot be said to have caused the loss. The argument identifies the true cause of the loss as the improper conduct of Messrs Howes and Sheers.

It may be accepted that, had proper procedures been in place, Messrs Howes and Sheers may nevertheless have attempted to obtain benefits from the making of loans. It does not follow, however, that it was inevitable or nearly so that the defaulting loans would have been made, renewed or extended."

[111] But there the learned trial judge was essentially dealing with an argument that the improper activities of Sheers and Howes were the "true cause of the loss". As the reasoning in March v Stramare demonstrates, there is a significant difference between the appropriate application of the "but for test" and asking the question was some identified conduct the "true cause of the loss".

[112] In this context the reasoning of the High Court in the recent decision Commissioner of Main Roads v Jones [2005] HCA 27; (2005) 79 ALJR 1104 is also instructive. There is, at least, a deal of speculation when considering whether a person would have acted differently if some additional warning had been given.

[113] I respectfully adopt the careful analysis of authority in the reasoning of Keane JA on the question of causation.

[114] A consideration of all the evidence placed before the court by the respondent does not persuade me that the respondent discharged the onus of establishing that but for the appellant's alleged breach of duty a loss would not have been made on all or any of the five loans in question. Each of the five loans would in all probability have been approved in the same way and the same losses would have been incurred regardless of any extra precautions imposed by the appellant. It follows from that that the respondent fails at the threshold test for causation.

[115] The appeal should be allowed, the judgment at first instance set aside, and it should be ordered that the action against the appellant be dismissed. The respondent should pay the appellant's costs of and incidental to the action and the appeal to be assessed on the standard basis.

[116] KEANE JA: The respondent was incorporated in December 1997 and subsequently carried on the business of providing unsecured loans to accountants. The appellant was one of a number of directors of the respondent. In 1999 and 2000, the respondent made a number of improvident loans. The respondent was unable to recover the full amount of the principal of these loans from the borrowers. Proceedings were brought in the Supreme Court of Queensland against a number of persons, including the appellant, to recover the outstanding principal lent by the respondent.

[117] After a trial, the learned primary judge upheld the respondent's claim, and entered judgment in favour of the respondent against the appellant for $3,629,000. His Honour accepted the respondent's argument that its losses on the improvident loans were suffered because of the appellant's failure as a director of the respondent to ensure that adequate loan application assessment procedures were established and maintained by the respondent.

[118] The appellant seeks to challenge the judgment on two broad grounds. First, the appellant argues he had no responsibility for the loan application assessment procedures adopted and applied by the respondent. Secondly, the appellant argues that the making of the improvident loans would not have been prevented by the adoption of loan assessment procedures of the kind which the trial judge held should have been adopted, or by the exercise of proper supervision by him of the respondent's business as a non-executive director.

[119] My discussion of the issues which arise on the appeal will be divided into three parts. In Pt I, I will summarise the case advanced by each of the parties at trial. In Pt II, I will summarise the learned primary judge's findings and conclusions. In Pt III, I will address the arguments of the parties which were advanced on appeal.

Pt I

The respondent's case at trial

[120] The business established by the respondent consisted of a lending program which involved offering loans of up to $1,000,000 to practising accountants or their associates. Any such loan could not exceed 80 per cent of the fees generated by the accountant's practice for which accounts had been rendered but which remained unpaid.^[1] The loans made to accountants by the respondent were for 90 days, but borrowers might seek extensions or increases by notice in writing to the respondent supported by a new certificate of fees owed to the borrower at the end of the 90 day period.

[121] The appellant was first introduced to the proposal for the lending program in the middle of 1997. At that time, the promoters of the scheme were Richard Sheers, Garry Howes, Stephen Romp and a solicitor, Godfrey Michael Stewart. When the respondent's lending business was established, and for most of the time that the lending program was in operation, the directors of the respondent were the appellant, Sheers, Romp, Howes and Robert Taylor.^[2] The respondent actually commenced to implement its loans program in early 1999.^[3]

[122] The administration of the respondent's lending program was performed by Austide Holdings Pty Ltd ("Austide") pursuant to an administration agreement with the respondent. Austide was controlled by Ms Sheridan Schweitzer, who was the de facto wife of Sheers. Ms Schweitzer's former husband, Ronald Schweitzer, worked for Austide.

[123] The funds necessary to make the loans were provided to the respondent pursuant to a $25,000,000 bill facility from a bank which became Colonial State Bank ("the Bank").

[124] The respondent and the Bank were indemnified against loss incurred as a result of default on the loans by a policy of insurance issued by HIH Winterthur Casualty and General Insurance Ltd ("HIH").^[4]

[125] The Bank was required to give six months' notice of termination of the bill facility. The Bank gave this notice in January 2001. On 15 March 2001, provisional liquidators were appointed to HIH.^[5] On 8 August 2001, the respondent went into liquidation.^[6]

[126] The administration agreement between the respondent and Austide, signed on 7 June 1999, expressly obliged Austide to comply with the procedures referred to in
cl 1 of the administration agreement. That clause contemplated that Austide would, on behalf of the respondent:

"perform a due diligence assessment of the applicant. Such assessment shall involve but shall not be restricted to:
ASC searches
CRAA searches
Any other relevant searches
Confirmation of membership(s) of professional organisation(s)
... check and verify guarantees provided by various parties - directors of shareholder companies, shareholders if major shareholder is not a director ...
... complete Application Assessment Form and determine, in accordance with the credit policy, whether the application for registration is successful" (emphasis added)

[127] These procedures contemplated that the decision to approve an application would be made by Austide on the respondent's behalf. It appears that, at least in relation to the improvident loans, Ms Schweitzer consulted with the directors of the respondent other than the appellant, as to whether funding should be approved. In this regard, a note of a meeting of directors, other than the appellant, on 3 February 1999 recorded that any "borderline" applications for funding should be discussed with a director prior to approval or rejection of the application. There was also evidence from Romp that, for advances in excess of $250,000, Ms Schweitzer was required to obtain the approval of a director. That evidence was uncontradicted.

[128] It should also be noted here that there was an annexure to the policy of insurance between the respondent, the Bank and HIH. This annexure was headed "Credit Policy". That document contained a number of prescriptions in relation to the respondent's lending program. Some were described as "imposed by HIH", others were described as "self-imposed by [the respondent]". The latter category included a provision that:

"[w]here the maximum funding entitlement is above $200,000, [the respondent shall] make a recommendation to a Director that the funding be approved. A Director shall be required to certify any approval of such a recommendation following careful examination of relevant documentation."

[129] The Credit Policy also included a provision that, in the case of applications for extension or variation, where there had been a "substantial change in the Applicant's Outstandings position from original application to date", the respondent's recommendation to a director should be made "noting that ... two directors shall be required to approve the funding where the maximum funding entitlement exceeds $200,000". If the change was substantial, a director might, inter alia, "request member to explain" or "seek an audit". These particular prescriptions of the Credit Policy were not repeated in the administrative procedures referred to in the administration agreement between the respondent and Austide; and it would seem that the decision-making process in relation to the approval of loans was formally regulated in the manner referred to in paragraphs [126] - [127] above. The respondent's case and the evidence was silent as to the particular circumstances of the interaction between Ms Schweitzer and the directors of the respondent in relation to the making of the improvident loans. It is apparent, however, that Sheers and Howes were involved in those decisions.

[130] The point of referring to these matters here is to note that it was no part of the respondent's case that the appellant was duty bound to ensure that any loan applications (even "borderline" applications or applications for advances in excess of $200,000 or $250,000) should have been presented for decision to more than one director or to two directors other than Howes and Sheers. One may pause to observe that it is difficult to imagine that the requirement that Austide refer loan applications in excess of $200,000, or "borderline" applications, to a director could have been understood by the board of the respondent, or anyone else, as serving any purpose other than to ensure the making of a responsible commercial judgment as to the prudence of the proposed loan. This observation draws attention to the relationship between the elements of breach and causation in the respondent's case. It will be seen that the respondent's case as to breach of duty by the appellant rests upon a failure on the part of the appellant to ensure that the respondent's loan program was administered according to standards of prudence so basic as to be obvious to any lender. In such circumstances, the respondent's case as to causation, ie that the improvident loans were made because those standards were not explicitly adopted by the board of the respondent, may seem somewhat implausible. If there were standards that were obvious to any lender, why would expressly stating them make it more likely that the loans would not have been made? Especially is this so where the decision to make the loan depends on the input of a director whose role can only be concerned with the prudence of making the loan to the particular borrower. The respondent's case, and, in consequence, the judgment below, did not come to grips with these considerations.

[131] Under Austide's appointment, the "due diligence assessment" to be performed by Austide in relation to each applicant for a loan was, expressly, not limited to making the searches, the checking of guarantees (where they happened to be provided), and checking that application forms were duly completed. Austide's obligations of "due diligence" under the administration agreement required it to do whatever was reasonably necessary in the circumstances of each particular loan application in order to establish the applicant's eligibility for a loan and capacity to service and repay the loan. A process of "due diligence" in relation to an application for a loan under the respondent's lending program could have had no other purpose. The term "due diligence" could have meant nothing less. What might have been reasonably necessary might vary according to the risks acceptable to the respondent and the returns sought by it; but it cannot be doubted that this was the minimum content of Austide's obligation under the administration agreement with the respondent. The respondent's pleaded case in relation to Austide's obligations did not, however, proceed by such a simple and direct statement of Austide's obligations.

[132] The respondent's statement of claim alleged that it was an implied term of the administration agreement that Austide would conduct the administration of the funding program in accordance with "accepted lending practice". This expression was defined by, inter alia, paragraph 8(c)(iii) of the statement of claim as:

"the practice undertaken by professional lenders from in or about 1999 until 2001, being to undertake appropriate pre-lending due diligence which required the lender, before making a loan, to be firstly satisfied that the applicant, plus the asset base being funded, qualified for a loan under the terms of the facility; secondly, that the applicant had the financial capacity to both service the loan (in terms of making the required payments on the loan) plus repay the loan capital; and thirdly, that the requirements imposed on applicants by the terms of the loan application had been satisfied by the applicant."

[133] Paragraph 8(c)(iv) of the statement of claim elaborated upon the content of "accepted lending practice". It alleged relevantly that:

"accepted lending practice from in or about 1999 until 2001 required [Austide] to seek from applicants independent proof or verification of the following matters . . .
A. the applicant was in fact a registered practising accountant;
B. the certified accounts receivable existed, in fact, and were comprised of professional fees rendered to the applicant's accountancy clients and did not include work in progress;
C. the applicant's credit history was appropriate in that the applicant was not currently experiencing and/or had not in the immediate past or repeatedly in the past experienced financial difficulty;
D. the applicant had the existing financial capacity to service the loan (in terms of making the required payments on the loan) plus repay the loan capital in terms of the loan arrangements, preferably from demonstrated ongoing cash flow, but, at the very least, from available assets of the applicant and/or the guarantors;
E. the terms and conditions of the loan application were otherwise satisfied by the applicant."

[134] The content of Austide's alleged obligations in relation to due diligence might be taken to reflect the substance of Austide's obligations under the administration agreement even though they are stated to be established by reference to the practice of professional lenders. It will be seen that this was the view which seems to have commended itself to the learned trial judge.

[135] It should be emphasised here that the respondent's case against the appellant did not involve a more precise statement of the specific content of the standards of prudent lending practice to which Austide should have been required to adhere. Thus, it was no part of the respondent's case, for example, that the appellant should have ensured that the respondent would require any particular ratio between an applicant's assets and the amount of the loan or any particular ratio between an applicant's income and the amount of the loan or interest payments in respect of the loan. Similarly, it was not the respondent's case that the appellant should have ensured that the respondent required of Austide all the procedures referred to in the draft provided to the Bank by Romp in April 1998, to which reference will shortly be made. Rather, the respondent argued simply that the appellant had failed to ensure adherence to standards of "accepted lending practice".

[136] The respondent sought to adduce evidence of "accepted lending practice" from Bundesen, but the learned trial judge was sceptical of Bundesen's ability to give expert evidence in this regard and treated her evidence as not of "much weight ... as to what constitutes 'accepted lending practice' ...".^[7] Nevertheless, as will be seen, the learned trial judge concluded that the respondent's loan assessment procedures fell below the standards referred to in the pleading and the judgment as "accepted lending practice".

[137] The loan application form which was used by the respondent provided for the name and address of the applicant, details of professional indemnity assurance, and membership of professional associations, a description of the bank account from which interest payments could be directly debited, and a statement of the accounts receivable in respect of which the advance was to be made (the receivables were broken up into fees which were current and fees which were outstanding for more than 30, 60, 90 and 120 days). It had provision for a declaration that the information was true. The terms and conditions of the loan were also set out, and, of these, cl 10 provided:

"The applicant acknowledges that [the respondent] may carry out an audit of the Applicant's outstanding fees at any time it deems appropriate at the Applicant's expense."

I pause to note that no such audit was ever carried out by the respondent.

[138] The respondent's case against the appellant was that, in dereliction of his duty as a director of the respondent, the appellant failed:

• to ensure that the respondent's lending procedures were established and applied so as to comply with accepted lending practice; and

• to ensure that the respondent's lending program was administered by a competent administrator.

[139] The respondent argued that the appellant, being the only member of the respondent's board of directors with extensive lending experience, failed to ensure that the lending program "was set up so as to comply with 'accepted lending practice' and thus to minimise the risk of borrowers' defaults".^[8] As to the administration of the loan program, the respondent contended that Austide, under Ms Schweitzer, was incompetent by reason, inter alia, of "her lack of appreciation of the 'due diligence' inquiries which should have been carried out with respect to unsecured loans of the size of those involved in the scheme".^[9] The improvident loans were allegedly made because of these breaches of duty by the appellant.

[140] The evidence in support of the respondent's case at trial consisted in large part of documents, and oral evidence from Romp and Taylor, relating to the history of the respondent's business and the improvident loans. The respondent also relied extensively on statements made by the appellant in the course of a public examination by the respondent's liquidators in October 2001.

[141] A summary of the advances made in relation to the improvident loans is as follows:

Borrower Amount Date
Advanced
(i) Jumarsh Pty Ltd $342,000 12 March 1999

$100,000 14 July 1999

$400,000 3 September 1999

$842,000

(ii) Venola Pty Ltd $350,000 May 1999

$450,000 22 July 1999

$800,000

(iii) Spiller Holdings $143,500 7 June 1999

Pty Ltd $102,500 14 July 1999

$ 80,000 6 October 1999

$276,000 24 February 2000

$602,000

(iv) Gary Peter Moss $350,000 21 October 1999

$300,000 17 November 1999

$ 85,000 28 April 2000

$735,000

(v) John McCouat $100,000 19 April 2000

$700,000 15 May 2000

$800,000

It should be noted that Jumarsh had repaid $170,000 of the principal advanced to it before its loan was called up. None of the other four borrowers appear to have made repayments.

The appellant's case at trial

[142] The appellant's case at trial was that he had not approved of Austide's appointment as administrator of the loan program. Indeed, he had opposed Austide's appointment, but had been overruled on this issue by the other directors. The appellant contended that there was no real prospect that he could, at any time, have persuaded the board of the respondent to remove Austide as administrator of the respondent's loan program, and that there was no obligation upon him to attempt to do so. In this regard, it was not irrelevant that Sheers was the de facto husband of Ms Schweitzer, the principal of Austide.

[143] The appellant also contended that in 1998 and 1999, when the lending program was being formulated and established, he was excluded from the other directors' discussion, or at least he was he was not invited to participate. Furthermore, the directors of the respondent discussed the issue whether independent proof of the existence of an applicant's receivables (and the extent to which they represented professional fees payable to an accountant) and financial statements should be sought from borrowers as part of the loan approval process. The appellant was not involved in these discussions or the decision not to seek this information in relation to loan applications. He contended that he had no responsibility for these decisions.

[144] The appellant also said that he believed that the loan application assessment procedures adopted by the respondent reflected those referred to in a draft submission to the Bank prepared by Romp in April 1998. That draft submission required, inter alia, the provision of financial statements by some applicants.

[145] The appellant also sought to take advantage of the defence provided to company directors by the "business judgment rule" (now contained in s 180(2) of the Corporations Act) by arguing that he made a judgment that it was not in the respondent's best interests for him to continue to engage in disputation with the other directors about Austide's appointment as administrator and about the respondent's lending procedures. It was said that he decided not to "rock the boat".

[146] In relation to the issue of causation, the appellant contended that the loan assessment and administration procedures which had actually been adopted by the respondent would, if followed, have prevented the making of the improvident loans. The appellant argued that the improvident loans were made solely as the result of the fraudulent activities of Sheers and Howes in collusion with Ms Schweitzer and the borrowers concerned in those loans.

[147] Neither Sheers, nor Howes, nor Ms Schweitzer gave evidence at the trial. It appears Ms Schweitzer had been served with a subpoena by the respondent requiring her to attend to give evidence, but was later told by the respondent that it was not necessary for her to answer the subpoena.

Pt II

The learned trial judge's findings as to the establishment of the respondent's business

[148] The appellant was born in 1943. He had spent his working life in finance and debt collection. He worked for many years with Australian Guarantee Corporation Ltd ("AGC") with whom he had occupied the positions of divisional State manager in South Australia, and head office zone credit manager before leaving AGC's employment in 1987. As I have mentioned above, the appellant was first introduced to the proposal for the lending program in the middle of 1997.^[10]

[149] On 28 May 1998, the appellant, Romp and Stewart met with officers of the Bank to seek to persuade the Bank to fund the loan scheme.^[11] The Bank signified its agreement by letter dated 20 August 1998. The facility agreement was signed on 24 February 1999.^[12]

[150] In April 1998, Romp had prepared, with the assistance of a Mr Allen, a finance broker involved in the marketing of the loans, a draft of a submission entitled "Accountants' fees funding program". The draft submission contemplated that CRM, a company controlled by the appellant, would carry out a due diligence exercise in respect of each loan application at the request of Gold Ribbon Corporate Services Pty Ltd ("GRCS"), a company related to the respondent. Under this draft, if the applicant was a corporation, a statement of the assets and liabilities of its directors would be required; applicants for loans in excess of $250,000 were to be required to provide financial statements for the previous two years; applicants for loans in excess of $1,000,000 were to be required to provide financial statements for the previous three years, a business plan and any other information which might be required by HIH or the Bank. Further, GRCS was to have the right to direct audits of borrowers at the expense of the borrower concerned. This document, or a document in substantially this form, was presented to the Bank as part of the respondent's application for the bill facility. It stated, inter alia, "GRCS will market and manage the scheme and the risk control mechanisms shall be put in place by CRM".^[13]

[151] By facsimile dated 22 May 1998, Romp requested the appellant to prepare a draft of an administration agreement to be made between CRM and the respondent. Whether or not this draft was prepared, it was not executed.^[14]

[152] Sheers and Howes were opposed to the appointment of CRM to manage the scheme. There was a high level of personal animosity between Howes and the appellant. There was also animosity, albeit to a lesser extent, between Sheers and the appellant. On 19 August 1998, Stewart wrote to the appellant informing him that the appellant and CRM would not be performing the administration of the scheme (except for debt collection), and that others were being considered as potential administrators of the scheme.

[153] On 24 November 1998, the respondent appointed Austide to carry out the due diligence process in relation to the assessment of loan applications.^[15]

[154] As appears from the minutes of the respondent, between November 1998 and 16 April 1999, the respondent's directors, other than the appellant, worked on settling the documentation necessary for the operation of the business.^[16]

[155] The appellant was aggrieved, inter alia, by what he perceived to be the respondent's reneging on an agreement with the other directors that his company CRM would administer the respondent's business. He prepared a letter of resignation as a director of the respondent. This letter was dated 10 March 1999. The learned trial judge did not make a finding that this letter was actually sent. In any event, the appellant subsequently acted as a director of the respondent and was treated as such by the other directors. That this was so is apparent from minutes which record his attendance at a meeting of directors of the respondent on 28 May 1999 when Stewart resigned as a director and Taylor was appointed.^[17]

[156] The 28 May 1999 meeting was the first board meeting which the appellant attended in 1999. He had not attended three board meetings held earlier that year. His absence from board meetings reflects his absence of involvement in the preparation of the respondent's loan assessment procedures.

[157] While the appellant was not involved in the work of formulating the documentation necessary for the operation of the business, he had been responsible for devising what was referred to as "the matrix". The matrix was the template by reference to which the maximum loan to each borrower was to be computed, having regard to the size of the borrower and the distribution of receivables over time.^[18]

[158] The appellant was also involved in the business of the respondent in relation to debt recovery. In January 1999, CRM executed an agreement with the respondent whereby CRM was appointed to conduct certain debt recovery services for the respondent.^[19] This appointment appears to have been made at the request of the Bank.^[20]

[159] A meeting of the directors of the respondent on 5 February 1999 resolved that Romp and Howes "liaise to finalise the content and distribution of marketing materials".^[21]

[160] The administration agreement between the respondent and Austide was not signed until 7 June 1999.^[22] This was, of course, well after the respondent's business had commenced. Nothing was said to turn on this delay so far as the rights and obligations of the parties are concerned.

[161] By the end of 1999, Romp had become concerned about Austide's administration of the business and, in particular, whether the lending criteria and procedures were sufficiently rigorous. As a result of discussions between Romp and the appellant, the appellant told Ms Schweitzer on 10 November 1999 that he had been instructed by Romp to conduct a random audit of the administration of the business. Upon becoming aware of it, Howes opposed this suggestion. Ms Schweitzer also opposed this suggestion, and proposed that an employee of the Bank should carry out the audit. Ms Schweitzer did not oppose the appointment of an auditor, as long as it was someone other than the appellant. In the event, no auditor was nominated or appointed.^[23]

[162] On 6 April 2000, Romp and Taylor, by facsimile to the other directors and Ms Schweitzer, proposed that no further loans be made until after the implementation of legal advice which had been obtained in relation to the business documentation. In particular, they suggested that the directors should reconsider the view which had earlier been taken that loans might be made to borrowers who had charged their assets to other creditors. They also asserted that work in progress should not be taken into account in determining the extent of clients' book debts.^[24]

[163] A minute of a meeting of directors on 17 May 2000 shows that the appellant and Romp, Taylor, Sheers and Howes attended a meeting where there was discussion of whether the respondent should itself require a charge over borrowers' assets. Howes was opposed to such a course. The minute records that it was "agreed in principle", however, that "more stringent requirements on advances" should be imposed. To that end, the board resolved that a committee consisting of the appellant, Ms Schweitzer and Allen consider what recommendations should be made to the board in relation to the adoption of more rigorous lending requirements.^[25] It appears from the minutes of this meeting that the directors "reinforced the policy that only invoiced work can be included in the Receivables".

[164] Ms Schweitzer, by a facsimile dated 2 June 2000, invited the appellant to indicate his views on the issue of whether the respondent should require a charge over the borrower's assets. The appellant does not appear to have responded to that invitation.^[26]

[165] The learned trial judge found that, in mid-2000, the board of the respondent was becoming more circumspect in relation to the respondent's lending practices. There was agreement that new borrowers should be required to produce lists of debtors, and that for loans between $250,000 and $500,000 financial statements should also be required. Further, for loans over $500,000, the borrower was to be required to give a first charge over its debts, to provide tax returns for the previous years and, in the case of company borrowers, to provide directors' guarantees. Taylor and the appellant sought to go further and to have these new requirements applied to existing borrowers. Howes opposed that course in relation to existing borrowers. As a result of this difference of opinion, the proposed alterations to the credit policy were not implemented at all.^[27]

[166] I pause here to observe that the full amount of the improvident loans had been advanced by 15 May 2000. The point of this interruption in the summary of his Honour's findings is to draw attention to the reality that any remedial measures taken after this date, in terms of the improvement of the respondent's procedures or greater diligence in supervision by the appellant, was unlikely to improve the respondent's position in relation to the improvident loans. It was no part of the respondent's case that action after this time could have recovered the loans or any part of them from the borrowers.

Accepted lending practice

[167] As has been seen, the trial judge rejected the respondent's attempt to rely on the evidence of Bundesen to establish "accepted lending procedures". Nevertheless, his Honour concluded that:

"what was contemplated by the obligation imposed on Austide to perform a 'due diligence assessment of the Applicant' was not something purely formal and directed to showing that the applicant qualified for a loan and had completed the requisite forms. The required assessment also concerned the ability of the applicant to meet its obligations should a loan be made. In other words, it included a risk assessment."^[28]

[168] His Honour went on to hold that the directors of the respondent failed to exercise due skill and diligence in setting up and implementing the respondent's loan assessment and monitoring procedures "such as to minimise the risk of defaults by borrowers".^[29]

[169] The trial judge held that the respondent's lending procedures did not include inquiries apt to ensure that applicants for loans had the capacity to meet interest payments on the loan or to repay the principal. No measures were taken to ensure that the applicants' certification of debts was accurate and, in particular, that the debts did actually exist.^[30] Austide, in administering the respondent's business, did not seek verification of the applicants' certification of debts. Nor did it monitor fluctuations in the debts owed to a borrower.

[170] The loan application assessment procedures did not contain a mandatory requirement that the borrower be a practising accountant (whose practice generated the debt for fees, by reference to which an applicant might qualify as a borrower). It was important that the receivables should be fees generated by an accountant for two reasons. First, as has been seen, HIH's insurance policy provided cover only on this basis. Secondly, as his Honour observed, an important assumption as to the soundness of the lending program was "the assumed reliability and financial stability of the class of borrowers participating in the scheme".^[31]

[171] His Honour found that no lender exercising reasonable prudence would ignore the need for "fundamental lending precautions", and would not have done so on the strength of the existence of the HIH insurance policy. The insurer's continued participation in the scheme was dependent on claims being kept to a level which ensured it an acceptable level of profit.^[32] And, in any event, if the business was to be profitable, the respondent's borrowers had to be able to service their loans.

[172] The trial judge found that Austide failed to follow "accepted lending practice" in that:

"contrary to the terms of its agreement concerning due diligence, [Austide] conducted no due diligence inquiries with a view to satisfying itself that the applicant had the financial capacity to service and repay the loan."^[33]

The judge also held that:

"[i]n so doing, Austide followed the procedures expressly required by the bill facility agreement and the policy of insurance. Generally speaking, it did no more than what was required to process the application forms settled by Ms Schweitzer in conjunction with representatives of the [respondent]."^[34]

[173] It can be seen that his Honour's conclusion was based on the abject failure of Austide to address at all fundamental considerations of prudence in lending. It was not that Austide failed to meet sophisticated or complicated standards, or standards which specifically focussed upon the particular exigencies of the respondent's business. There was simply a failure to apply the basic requirement of a risk assessment.

[174] The trial judge emphasised the high risk nature of the respondent's lending. The interest rate charged by the respondent was almost twice the prevailing bank interest rate for comparable secured loans, and so applicants for loans were likely to be accountants "at the lower end of the profession"^[35] to whom lending substantial sums would be attended with a degree of risk reflected in the interest rate on the loans. The requirement of some means of verifying the accuracy of the borrower's debt certification was a measure which was obviously necessary to address the risks inherent in the respondent's business as a "last resort lender".^[36]

Was the appellant excluded from the respondent's business?

[175] Both Sheers and Howes sought to exclude the appellant from the business. The learned primary judge found that:

"[n]either [Sheers nor Howes] was inclined to compromise or conciliation and Howes exhibited a degree of aggression in his dealings with other directors which inhibited any calm exchange of views and dispassionate decision-making".^[37]

[176] His Honour did not, however, accept that Sheers and Howes were entirely successful in their efforts to exclude the appellant from the affairs of the business. Indeed, his Honour did not accept that the appellant was prevented from participating in discussions relating to the loan assessment procedures to be adopted by the respondent. Importantly in this regard, his Honour found that there was nothing to prevent the appellant's participation in discussions, and there were reasons to think that, on some issues, his views might have prevailed at board level against Sheers and Howes. During the period that Stewart was a director of the respondent, he was not aligned with Sheers and Howes. Nor was Taylor. Romp was generally aligned with the appellant, but Sheers and Howes did not exhibit towards Romp the personal hostility which they displayed towards the appellant.^[38]

The findings as to breach of duty by the appellant

[177] His Honour found that the appellant had not involved himself in any significant way in establishing the respondent's loan procedures after his initial discussions with the Bank.^[39] That finding relates specifically to the period between May 1998 and
mid-1999 when those procedures were established.

[178] The loan application assessment procedures had been established by Ms Schweitzer and Taylor. Taylor had no experience of the lending business. Ms Schweitzer had 16 years' experience as, among other things, a loans assessor and relieving branch manager for Custom Credit Corporation. She had also spent 10 years involved in the administration of a private hospital and as manager of a medical day procedure centre.^[40]

[179] The learned trial judge found that the appellant did not put "a reasoned submission before the board" in an attempt to remedy the respondent's deficient loan procedures and Austide's incompetent administration.^[41]

[180] His Honour found that if the appellant, with his extensive experience of the lending business, had involved himself in the respondent's business affairs, he would probably have identified the inability of Ms Schweitzer and of the directors of the respondent (other than himself) to devise adequate lending procedures.^[42] In this regard, his Honour found that Ms Schweitzer and her former husband, Mr Ronald Schweitzer, who was also involved with Austide, were capable of carrying out adequate loan application assessment procedures, but they were not competent to devise and establish the necessary procedures.^[43] His Honour also found that "[a]lthough Ms Schweitzer and Mr Ronald Schweitzer appeared sufficiently qualified to administer the scheme, the inadequacy of their administration ... revealed their lack of competence".^[44] (emphasis added) I pause here to note that there may be some tension between these findings. It may be that this reference to a "lack of competence" is to be taken to refer to their lack of competence in devising appropriate procedures. But it is also clear, as will become apparent, that their administration was inadequate, in terms of their failure to apply the procedures which had been adopted. His Honour found that Ms Schweitzer and Mr Schweitzer appeared to be competent to administer the loan program, but failed to do so. The most charitable characterisation of their actual administration of the loan program is that it was "incompetent". I will discuss the implications of this point in due course in relation to the issue of causation.

[181] His Honour also found that the appellant did not believe that the respondent's loan procedures reflected those referred to in Romp's draft submission to the Bank of April 1998.^[45] Further, his Honour held that, even if the appellant had such a belief, it was itself the product of his dereliction of duty in failing to address himself to the respondent's loan assessment procedures.^[46]

[182] The appellant knew that his involvement in the respondent's business was being bruited to the Bank and HIH as a positive aspect of the respondent's proposed business because of the appellant's experience in the lending business.^[47] I note that, in the course of a public examination of the appellant by the liquidator of the respondent on 9 October 2001, the appellant said that he "was being used for ... [his] credentials to get the facility that was originally approved for [$]25 million with [the Bank]". The appellant thereby acknowledged that his involvement with the respondent was an integral part of the Bank agreeing to finance the respondent's business.

[183] The appellant was not an executive director. Other directors exercised executive functions. The learned trial judge held that the appellant was not relieved of his obligations simply because other directors were exercising executive or managerial functions. The appellant's obligations in relation to ensuring that the business had been properly established could not be delegated to others.^[48]

[184] Further, the appellant had no reasonable basis for the belief that the other directors and Ms Schweitzer were competent to ensure that the business would be properly structured.^[49] It may be noted in this regard that, in the course of his public examination in October 2001, the appellant said: "Austide never had any credit experience in my opinion."

[185] The respondent had mounted a strong case that the appellant failed to turn his mind to the adequacy of the respondent's loan application assessment procedures. The appellant admitted in cross-examination that, even at the date of trial, he had not read either the bill facility agreement, the HIH policy or the administration agreement between the respondent and Austide.^[50] The appellant did not attend the first three meetings of the board which were held in 1999. He said that he was not invited to these meetings. The trial judge made no finding in the appellant's favour in this regard. He must be taken to have rejected the appellant's evidence.^[51] That rejection was entirely understandable given that, in the course of his public examination in October 2001, the appellant said that he did not attend the early board meetings of the respondent after its lending program had commenced "because I was supposed to get the contract and I didn't get it and I was very upset about that".

[186] The appellant sought a finding for the purposes of s 180(2) of the Corporations Act to the effect that he had made a "judgment" that it was not in the best interests of the respondent for him "to continue to rock the boat". The learned trial judge found that the appellant "did not concern himself at all with the contents of the Austide agreement or with the administrative procedures applicable to the scheme".^[52] His Honour expressly declined to make a finding that the appellant had made "the judgment" which the appellant alleged he had made.^[53] His Honour found that the appellant had not turned "his mind to whether 'the judgment' was in the best interests of the [respondent]."^[54] His Honour found that the appellant had "washed his hands" of responsibilities relating to the administration agreement and the affairs of the respondent generally as a result of CRM being denied the administration agreement.^[55]

[187] During the period between May 1998 and November 1999 the lending "scheme and its administrative procedures were devised and implemented" without the benefit of the appellant's consideration of these matters.^[56]

[188] The trial judge found that the appellant "failed to ensure that the scheme was set up so as to comply with accepted lending practice"^[57] in that there was not established:

"a set of procedures under which the [respondent] would conduct inquiries and obtain evidence with a view to ensuring that loan applicants had the financial capacity to service the loan and repay loan capital. There was a failure also to take measures to ensure that the certification of debts by the borrower was accurate in all relevant respects and that the debts actually existed. These deficiencies also existed in respect of loan increases and extensions."^[58]

[189] The trial judge found that a "due diligence assessment" of an applicant for a loan in accordance with the terms of Austide's appointment should necessarily have "included a risk assessment" of each applicant.^[59] Austide did not carry out such an assessment. His Honour found that "the directors of the [respondent] who had contact with Ms Schweitzer concerning the administration of the scheme had no expectation that it would do so".^[60] I pause here to observe that this finding sits somewhat uneasily with his Honour's view that the failure to conduct a risk assessment was contrary to the terms of the administration agreement which required "due diligence" to be performed by Austide.^[61] The gravamen of the finding as to the appellant's breach of duty in relation to the establishment of loan assessment procedures seems necessarily to be that the appellant should have ensured that a risk assessment was expressly required (including the provision of financial statements and proof that the applicant was a practising accountant and that its certified debts were truly owing to it). It is possible, of course, that the directors of the respondent were not astute to insist on the full measure of the respondent's contractual obligations against Austide under the administration agreement, but to the extent that this was so, it is not referable to a breach of duty by the appellant in relation to the adoption of adequate loan assessment procedures.

[190] His Honour also found that the appellant failed to "apply himself to identifying deficiencies in the administration of the scheme with a view to remedying them".^[62] On this basis, his Honour found that the appellant, in common with the other directors, had "failed to ensure that 'accepted lending practice' was followed in the operation of the scheme".^[63]

[191] As to the appellant's duty to monitor Austide's performance, his Honour found that the appellant "with his experience and knowledge of what was originally contemplated, probably would have detected Mr Taylor's and Austide's inability to establish sound procedures had he involved himself in its affairs".^[64] It is to be emphasised, however, that his Honour did not treat this finding as "central to the question of liability".^[65] His Honour regarded:

"[t]he real issues [as being] whether proper loan administration procedures were put in place and implemented, whether, if they were not, Mr Dunn bears responsibility in that regard or whether he was entitled to rely on others."^[66]

[192] As has been seen, the trial judge found that the appellant failed in his duty to the respondent in failing to place "a reasoned submission before the board" calling for the replacement of Austide on the basis that it was not competent to administer the scheme.^[67] His Honour said, however, "again, it seems to me that this 'issue' is peripheral to the central questions in the case concerning liability".^[68]

The trial judge's conclusions on breach of duty

[193] The learned trial judge adverted to the authorities which affirm that a non-executive director is duty bound "to keep themselves informed about the activities of the company; ... to supervise managers and practices to determine whether business methods were safe and proper" by a "'general monitoring of corporate affairs and policies' rather than 'a detailed inspection of day-to-day activities'".^[69] His Honour concluded that the directors of the respondent, including the appellant:

"failed to exercise due skill and diligence in the setting up and implementation of the scheme. Their principal failure lay in not ensuring that the terms and conditions of loan and the administrative procedures were such as to minimise the risk of defaults by borrowers."^[70]

[194] The trial judge held that it was:

"incumbent on [the appellant] to familiarise himself with [the] documentation [relating to the agreements with the Bank, HIH and the Austide administration agreement], consider its adequacy and seek expert legal or other advice where appropriate. [The appellant] did not act in this way. He did not obtain copies of these documents to peruse."^[71]

[195] In short, the appellant's lack of knowledge as to the contents of these documents was "a result of his own disinterest"^[72] and breach of duty rather than as a result of his exclusion from the management of the affairs of the respondent.

[196] Of course, the appellant, as only one member of a board of directors, could not, by himself, have ensured that these deficiencies in the administration of the respondent's business were remedied. The trial judge seems to have taken the view that the appellant's failure properly to involve himself in the respondent's affairs meant that these deficiencies were not remedied when they could have been by the exercise of reasonable diligence on his part. It is convenient to discuss this point further in the context of the appellant's arguments in relation to causation.

The trial judge's conclusions as to causation

[197] The trial judge held that the appellant "would not have been able to persuade the board to replace Austide with CRM". His Honour went on to conclude, however:

"I do not accept that other directors were not open to persuasion about the adoption of lending criteria and administrative procedures calculated to minimise the risk that loans would be made to borrowers lacking the prescribed qualifications and the capacity to service and repay their respective loans. I consider it probable that the board of the [respondent] could have been persuaded to oblige Austide to adopt such practices and procedures had Austide's deficiencies been uncovered and brought to the board's attention."^[73]

[ 198 ] Before the learned primary judge, the appellant made two submissions in relation to the issue of causation. The first was that the cause of the respondent's loss was "Ms Schweitzer's misapplication of the existing procedures".^[74] The second submission was that:

"the five defaulting loans were made as a consequence of the fraudulent or improper activities between the borrowers on the one hand and Messrs Sheers and Howes on the other ... The argument identifies the true cause of the loss as the improper conduct of Messrs Howes and Sheers."^[75]

[199] In rejecting the first of the appellant's arguments on causation, the trial judge held that his findings were "sufficient to warrant a conclusion that the [respondent's] loss was caused by [the appellant's] breaches of duty" because the appellant's misconduct increased the risk of injury.^[76] The findings of fact to which his Honour referred were that:

• "the procedures, as understood by the [respondent] and Austide, did not require 'accepted lending practice' to be followed";^[77]

• "due diligence inquiries which would enable the [respondent] to be satisfied that the borrower had the financial capacity to service and repay the loan and to be satisfied that the certified debts actually existed, were not undertaken or contemplated";^[78]

• "[t]he negligent failure to incorporate these requirements in the administrative procedures and to ensure their implementation as part of the due diligence requirements of the Austide agreement contributed ... to the entering into of the defaulting loans";^[79]

• "[t]he inadequate loan application procedures and the general lack of rigour applied in assessing applications greatly enhanced the likelihood that bogus or unmeritorious applications would be approved";^[80] and

• "[w]hilst the adoption of procedures which conformed with 'accepted lending practice' may not have ensured that all such applications were detected, the prospects of detection, and deterrence, would have been substantially enhanced".^[81]

[200] In rejecting the second of the appellant's arguments in relation to causation, the trial judge reasoned as followed:

"It may be accepted that, had proper procedures been in place, Messrs Howes and Sheers may nevertheless have attempted to obtain benefits from the making of loans. It does not follow, however, that it was inevitable or nearly so that the defaulting loans would have been made, renewed or extended. Nor does it follow that any loan made for the benefit of them would have become a defaulting loan. Implementation of proper lending practice would have made it much more difficult for loans to have been made to borrowers lacking proven capacity to repay. Proper due diligence inquiries, also, would have made it more difficult for borrowers to have satisfied the preconditions for a successful application. Additionally, the application of appropriate rigour in the loan application and approval process, and in the course of loan administration, would have greatly increased the prospect of exposing irregularities and fraud. That in itself would have acted as a deterrent to directors inclined to act dishonestly. So too would the knowledge that [the appellant] was active in ensuring the proper loan administrative procedures were being carried out and that Mr Taylor was exercising a properly informed supervisory role."^[82]

[201] His Honour concluded that the appellant:

"by his breaches of duty in respect of fundamental aspects of the [respondent's] business, increased the risk that the [respondent] would suffer loss of the kind that eventuated and materially contributed to its loss."^[83]

[202] The trial judge was not satisfied that Ms Schweitzer "participated in any misconduct in relation to" the making of the defaulting loans or that she would have "approved an application had she been alerted to its failure to meet loan criteria or the existence of obvious risks of default".^[84] Further, his Honour was not satisfied that Ms Schweitzer colluded with Sheers and Howes or the borrowers in relation to the making of the defaulting loans.

The findings as to the circumstances of the defaulting loans

[203] The improvident loans were made to five borrowers. I now turn to the learned trial judge's findings as to the circumstances relating to each of the five borrowers.

[204] On 12 March 1999, the respondent approved an application for a loan from Jumarsh Pty Ltd ("Jumarsh").^[85] An advance of $342,000 was made on 12 March 1999 with further advances of $100,000 on 14 July 1999 and $400,000 on
3 September 1999. The directors of Jumarsh at the time of these advances were Julian Norton-Smith and Sheers. Sheers resigned as a director of Jumarsh with effect from 1 November 1999.^[86]

[205] The application form identified Julian Norton-Smith trading as Jumarsh, as the applicant for the loan. In another part of the form the "authorised person" was identified as Michael Norton-Smith and Julian Norton-Smith. The name of the professional indemnity insurer was Michael Norton-Smith who was a certified practising accountant. It was his professional membership and practice which were relied upon, to obtain the loan. He was a bankrupt when the loan application was made. His Honour said: "It would seem that no credit check was done on him or, if it was, it was not acted upon."^[87] A guarantee by each of Julian Norton-Smith and Michael Norton-Smith was accepted by the respondent.^[88]

[206] The loans were made to Jumarsh to enable it to on-lend the monies to Howes and companies in which Sheers was involved. Sheers witnessed Julian Norton-Smith's signature on the Jumarsh application. The learned trial judge inferred that Sheers and Howes were aware of the purpose of the borrowing and that Sheers was aware, as was the fact, that Norton-Smith's certification of receivables was false.^[89]

[207] On 10 May 1999, Venola Pty Ltd ("Venola") made a written application to the respondent for a loan.^[90] The application was approved by Howes. An advance of $350,000 was made in May 1999 and a further advance of $450,000 was made on 22 July 1999. The application form gave the name of the applicant as Venola Pty Ltd trading as (Qld) Assets Group. The "authorised person" who signed the application form on behalf of Venola was Darryl Loane; Loane gave the respondent a guarantee for the performance of Venola's obligations. He became bankrupt on 11 February 2000. He was the sole director and shareholder of Venola, but no evidence was obtained from him as to his membership of any professional accounting body. Venola did not carry on an accounting practice at any time. It did not have the receivables certified by it.^[91]

[208] When in July 2000, the loan for Venola was extended, Ms Schweitzer on the respondent's letterhead, wrote to Loane's wife, Ms Caerdinael, approving the application. On 15 August 2000, Caerdinael provided the respondent with a guarantee of Venola's loan obligations.^[92]

[209] On 28 May 1999, Spiller Holdings Pty Ltd ("Spiller") applied for a loan in an application which described the applicant as David Ryland, having a trading name "Spiller Holdings Pty Ltd Manly Business Services".^[93] Ryland was Spiller's sole director. He gave a guarantee of Spiller's obligations. The application was approved by Sheers. Further advances were made of $102,500 on 14 July 1999, $80,000 on 6 October 1999 and $276,000 on 24 February 2000.^[94]

[210] Austide did not obtain a search of "Manly Business Services" which was registered in Ryland's name. Spiller Holdings Pty Ltd did not carry on an accountancy practice.^[95]

[211] On 11 October 1999, Garry Moss applied for a loan which was approved on 15 October 1999.^[96] Advances were made to him of $350,000 on 21 October 1999, $300,000 on 17 November 1999 and $85,000 on 28 April 2000. The application was signed by Moss and was approved by Howes. The application was not completed in relation to the borrower's professional indemnity insurance. Howes was aware that false information was being submitted to the respondent. Sheers and Howes stood to benefit from, at least, the initial advance.^[97]

[212] On 13 April 2000, a loan application by John McCouat was approved by Sheers.^[98] Advances were made to him of $100,000 on 19 April 2000 and $700,000 on 15 May 2000. McCouat gave no trading name but provided a "practice address" of "Manly Business Services ... Stratton Terrace, Manly." McCouat's signature was witnessed by Loane.

[213] Austide carried out a search which showed that McCouat had become a member of the National Institute of Accountants and taken out professional assurance only at about the time of his application, but the application listed outstanding practice debtors of $1,707,023. There was no investigation of how McCouat could have generated receivables of this order when it was evident that he had only recently joined the profession.^[99] In fact, McCouat did not have the receivables certified in his loan application or in any of the applications for further loans or extensions of the loan.^[100]

[214] His Honour also referred to evidence that "Sheers was an acquaintance of Spiller, Mr McCouat and Mr Loane and that he had some form of business dealings with them"^[101] and found that "[t]here appears to have been a close connection between Venola, Spiller and Mr McCouat".^[102]

[215] His Honour found that Loane, Ryland, Moss and McCouat were all known to Howes and Sheers, but he held that the evidence did not establish that those persons conspired with Sheers and Howes to make bogus loans or that Sheers or Howes were likely to derive any benefit from the making of the loans to Loane, Ryland and McCouat or their companies.^[103]

[216] In relation to the Moss loan, however, his Honour found that Howes participated in the fraudulent application and both Sheers and Howes stood to gain from the loan through their companies.^[104] In this regard, his Honour's finding is at odds with his earlier finding that the evidence did "not support the conclusion that Messrs Sheers or Howes stood to gain financially from loans to ... Moss ...".^[105]

[217] His Honour also found it was probable that Sheers knew that false information had been supplied in respect of loan applications other than that made by Moss.^[106]

Pt III

The arguments on appeal

[218] The appellant accepted that the learned trial judge's findings of fact included findings which involved the rejection of the evidence given by the appellant. The arguments advanced by the appellant were not founded upon the appellant's evidence. Rather, the appellant sought to make good his arguments by reference to the trial judge's findings of primary fact or evidence adduced by the respondent. I shall address, first, the appellant's arguments in relation to breach of duty. I will then address the more difficult issue of causation.

Breach of duty

[219] It is convenient to begin this discussion by referring to recent statements of the obligations of a non-executive director in relation to the management of the affairs of a company. In Daniels v Anderson,^[107] Clarke and Sheller JJA said:

"We are of opinion that a director owes to the company a duty to take
reasonable care in the performance of the office ... That duty will vary according to the size and business of the particular company and the experience or skills that the director held himself or herself out to have in support of appointment to the office. None of this is novel. It turns upon the natural expectations and reliance placed by shareholders on the experience and skill of a particular director."

[220] In Re HIH Insurance; ASIC v Adler,^[108] Santow J summarised the principles applicable to s 180 of the Corporations Act in a way which also reflects the general law. Among other things, Santow J said:

"... in determining whether a director has breached the statutory standard of care and diligence (s 180(1)), the court will have regard to the company's circumstances and the director's position and responsibilities within the company ...
... in accordance with these responsibilities directors are required to take reasonable steps to place themselves in a position to guide and monitor the management of the company ... That is to say ...

(a) a director should become familiar with the fundamentals of the business in which the corporation is engaged;

(b) a director is under a continuing obligation to keep informed about the activities of the corporation;

(c) directorial management requires a general monitoring of corporate affairs and policies, by way of regular attendance at board meetings ...

... at general law, a director is entitled to rely without verification on the judgment, information and advice of management and other officers appropriately so entrusted. However, reliance would be unreasonable where directors know, or by the exercise of ordinary care should have known, any facts that would deny reliance on others ..."

[221] In his reasons for judgment in the Supreme Court of New South Wales in ASIC v Rich & Ors,^[109] Austin J, referring to a director's duties in the context of s 180(1) of the Corporations Law, said:

"... The content of [specific legal duties in particular circumstances] would be affected by the factual matters specified by the section, relating to the corporation's circumstances, the nature of the director's office, and the director's responsibilities. The director's responsibilities would include arrangements flowing from the experience and skills that the director brought to his or her office, and also any arrangements within the board or between the director and executive management affecting the work that the director would be expected to carry out. The precise duty of care flowing from these arrangements would be subject, of course, to a minimum standard of care and diligence set by the statute in reflection of the common law position."

[222] The appellant sought to focus upon the references in these statements of principle to arrangements for the allocation of responsibility amongst directors and the specific circumstances of the company to support the contention that the appellant had no responsibility for the adequacy of the respondent's loan application assessment procedures as they were established or implemented.

[223] The first thing to be said about this contention is that, as is made explicit in the citation from the reasons of Austin J in ASIC v Rich, the precise duty flowing from any specific arrangements will always be subject to a "minimum standard of care and diligence". The second point is that the allocation of a task of formulating procedures to one director cannot be regarded as denying the obligation of all directors collectively to consider the adequacy of what is produced by that process of formulation, at least where the procedures are fundamental to the structure of the company's business. The third point, which is of particular relevance to the case of breach of duty against the appellant in this case, is that a director who absents himself from attendance at meetings is obviously likely to disable himself or herself from adequately performing the obligation to keep informed about the company's activities so as to contribute to the collective management of the company's affairs, or from performing the obligation to monitor the company's affairs and policies. In this case, the appellant's lack of interest in the affairs of the respondent in the period from the end of 1998 until May 1999 could be readily inferred from his failure to attend board meetings and the absence of any contribution by him during this period to the respondent's lending procedures.

[224] The appellant's principal argument, advanced both orally and in written submissions, was that the appellant, as a non-executive director, should not be held liable for losses suffered by the respondent, where:

• the appellant had been excluded from the day-to-day management of the loan program as a result of the allocation by the board of those tasks to others;

• the board knew that the appellant would not be involved in those tasks; and

• those allocated the responsibility for the making of loans disregarded the established lending procedures in fraud of the respondent.

[225] There are fundamental difficulties with this argument which may be noted before the detail of the appellant's submission is discussed. The first difficulty for the appellant is that his argument assumes that the establishment of the respondent's lending procedures was a matter of the day-to-day management of the company. That assumption is plainly incorrect. The respondent's loan application assessment procedures were a fundamental element of the structure of the respondent's business. Ensuring that those procedures were adequate for the purposes of the respondent's business was a central aspect of the responsibility of all of the directors of the company.

[226] The second difficulty is that the task of establishing loan procedures was not one which was entirely delegated to others. To say that the entire responsibility for the adequacy of the respondent's loan assessment procedures was allocated to others (because the task of formulating the procedures in the first instance was given to others and because the appellant, or his company CRM, was not to be chosen as the administrator of the lending program) is egregiously to confuse responsibilities for drafting and implementation of procedures with the strategic determination of whether those procedures were adequate having regard to the nature of the respondent's business and the risks involved.

[227] The third difficulty is that the appellant's argument ignores the fact that the trial judge did not make a finding that Ms Schweitzer was complicit in fraudulently procuring the respondent to make the improvident loans. No such allegation had formed any part of the appellant's pleaded case at trial.

[228] Having made these general observations, I turn to the detail of the appellant's arguments in relation to breach of duty.

[229] It was argued for the appellant, in a number of ways, that the appellant should not have been held to have breached his duty as a director of the respondent in failing to ensure that the board of the respondent adopted and implemented more rigorous loan assessment procedures. The appellant emphasises the rejection by the board of CRM as administrator of the loan program, the determined opposition of Sheers and Howes, and Sheers' relationship with Ms Schweitzer. Accordingly, so it is submitted, he should not have been held to have breached his duty merely because he did not try, or try harder, to persuade the board. The appellant's written submissions contended:

• that other directors excluded him from decision-making concerning the respondent's administrative procedures;

• that other directors deliberately decided not to adopt more stringent procedures, knowing that these were available and more prudent;

• that the trial judge erred in finding that the appellant was negligent in failing to ensure that the administrator was competent;

• that the trial judge erred in finding that the other directors had no lending experience;

• that the appellant had resigned as a director during the period when two of the five defaulting loans were made;

• that the appellant was entitled to rely on the review of documentation made by the Bank and HIH; and

• that the trial judge erred in finding that the business judgment rule did not apply for the protection of the appellant.

I shall now discuss these seven contentions. I will then address the contentions advanced by the appellant in oral argument.

The limitation of the appellant's responsibility

[230] As to the first three of these contentions, the development of adequate loan assessment procedures was a crucial aspect of the core business of the respondent. This is apparent from the findings of the learned trial judge. Notwithstanding the appellant's grievance because Austide had been preferred to his company as administrator, the appellant was duty bound to contribute his expertise to the respondent's management in this regard as part of a director's duty to act "collectively to manage the company".^[110] It was a duty which the appellant could not hope to discharge by withdrawing, like sulking Achilles, from participation in this important aspect of the respondent's business.

[231] The appellant focussed upon statements in the decided cases to the effect that "[t]he extent of [a director's] duty must depend on the particular function he is performing, the circumstances of the specific case, and the terms on which he has undertaken to act as director".^[111] The appellant criticised the trial judge for failing to assess the content of the appellant's duty by reference to the evidence which showed that the other directors had deliberately allocated responsibility for the development of loan application assessment procedures to Stewart, Taylor and Romp, and had deliberately excluded the appellant from this task.

[232] As has been seen, the trial judge did not accept that the appellant had, in fact, been "excluded" from the management of the affairs of the company. There is no basis for setting aside that finding. Furthermore, the trial judge did not find that the appellant breached his duty to the respondent by reason of a failure to involve himself in the drafting of the loan application assessment procedures. His Honour's finding of a breach of duty related to the appellant's failure, in common with the other directors, to ensure that the loan application assessment procedures which resulted from the work of others were appropriate to the respondent's business.^[112] This failure was not concerned with any need for "detailed inspection of day to day activities, but rather a general monitoring of corporate affairs and policies".^[113] The loan application assessment procedures were fundamental to the respondent's business. These procedures defined the respondent's niche in the lending market. They were determinative of the risks which the respondent was willing to assume as a lender. That the appellant was not co-opted to the task of formulating these procedures did not relieve him of the obligation to give the respondent the benefit of his expert judgment of the adequacy of these procedures.

[233] The appellant contended that the respondent, by its directors other than the appellant, deliberately chose to make the respondent's "product" more attractive to potential borrowers by keeping the requirements of a successful application to a minimum. The appellant's argument was that the other members of the board had deliberately decided to overlook the considerations of basic prudence, and, indeed, the ordinary meaning of "due diligence".

[234] The first point to be made in relation to this contention is that the learned primary judge found that all directors of the respondent had breached their duty to the respondent in failing to ensure that more responsible procedures, answering the most basic requirements of prudence to minimise the risks of defaulting borrowers, were established.^[114] To the extent that the appellant seeks to rely upon the defaults of the other directors to exculpate himself from a breach of duty, that attempt must be rejected. The appellant, who did not trouble to argue against the approach of his co-directors, must share collective responsibility with those who actively participated in such a decision.

[235] A secondary point to be made here is that the evidence of Romp appears to be the only basis for the appellant's argument that a deliberate decision was made by the directors other than the appellant not to seek independent verification of receivables. There was no formal resolution of the board to that effect. The trial judge made no finding to that effect. On one view of Romp's evidence, this question was not actually the subject of an actual decision by the directors other than the appellant. This Court should not now seek to resolve the question as to the effect of Romp's evidence in a way more favourable to the appellant than was accepted by the trial judge. In any event, the trial judge found that all the respondent's directors failed in their duty to the respondent in this regard.^[115] The appellant cannot be in a better position than the other directors simply because he chose not to give the respondent the benefit of his expertise and experience.

[236] It is to be emphasised here that the possibility that more diligent efforts on the appellant's part (to ensure the adoption of procedures to minimise the risk of defaulting borrowers) may not have been successful was not a reason not to exert any effort at all in that regard. The learned trial judge's findings were that if the appellant had involved himself diligently in the business of the respondent, insofar as establishing lending procedures was concerned, there would have been a majority of the board who would have been disposed to adopt more vigorous standards. The appellant says that his Honour erred here in counting Taylor as a director who would have sided with Romp and the appellant against Sheers and Howes. The appellant argues that Taylor would have avoided taking sides in any such confrontation. But his Honour's conclusion reflects his assessment of Taylor and the view which he formed of his character. There is not, in my view, any basis on which this Court would be justified in setting aside these findings by the learned trial judge.

The other directors' lending experience

[237] With regard to breach of duty, the appellant's fourth contention was that the learned trial judge erred in holding that the appellant was the only member of the board with substantial experience in commercial lending. The appellant pointed to the evidence that Howes had some background in banking and that Taylor had worked as a financial manager. The appellant also complains that the trial judge left out the evidence of the previous involvement of Ms Schweitzer and Mr Ron Schweitzer in the finance industry.

[238] The respondent argues in response that the evidence at trial did not demonstrate that any of the directors other than the appellant had appreciable experience in commercial lending. The extent to which the directors other than the appellant had experience in commercial lending was relevant to the prospect that the appellant might have been able to persuade the others that more rigorous loan assessment procedures were necessary. Whether or not their experience in lending was properly to be described as "appreciable" depended upon the likelihood that the other directors, or some of them, may have been disposed to defer to the appellant's expertise and experience. Once again, the trial judge's assessment of these matters was based on his assessment of the character of each of the witnesses and his view of the likely interplay of these characters had the appellant put a "reasoned proposal" before the board. In any event, the appellant was clearly obliged to make available to the respondent his expertise and judgment in relation to the establishment and operation of the respondent's business.^[116] It is clear that he did not do so.

[239] Whether or not the appellant's failure to discharge his duty in this regard led to the absence of adequate loan assessment procedures or their application and thereby caused the losses suffered by the respondent are different questions, to which I shall return. The point for present purposes is that, whatever the expertise of the other directors of the respondent, the appellant was duty bound to make his expertise available for the benefit of the respondent.^[117] In my respectful opinion, the appellant's complaint does not undermine the trial judge's finding that the appellant failed to discharge his duty to the respondent.

The appellant's "resignation"

[240] The appellant's fifth complaint in regard to breach of duty was that the learned trial judge failed to appreciate that he had resigned as a director in March 1999, and so was not a director when the first two improvident loans were made. This complaint is one which is not open to the appellant. The appellant did not plead that he had resigned as a director at any material time, and did not plead that, as a result, he was relieved of any liability to which he might otherwise have been subject. The learned trial judge refused an application to amend the pleadings in this regard. In any event, the evidence of Romp was that, while the appellant showed him the draft resignation letter of 10 March 1999, the appellant did not send the letter to the respondent. While the trial judge made no finding on the question of whether the letter was sent (because that question was not in issue at the trial), it may be noted that his Honour was generally disposed to accept as accurate the evidence of Romp. This complaint must be rejected.

Reliance on the Bank and HIH

[241] In his sixth argument with respect to breach of duty, the appellant attacks the learned primary judge's conclusion that the respondent's loan assessment lending procedures were deficient. The attack is made on the basis that the willing involvement of the Bank and HIH in the lending business was a conclusive indication that the structure of the respondent's business was sound. This argument was rightly rejected by the learned trial judge.

[242] The Bank looked to the respondent and its servants or agents to devise appropriate due diligence procedures to ensure that improvident loans were not made. The attitude of the Bank and HIH could not sensibly be said to provide an appropriate measure of the skill and diligence required of the appellant as a director of the respondent. It is impossible to sustain the contrary view in light of the circumstance that the appellant said in his public examination in October 2001 that he "was being used for ... [his] credentials to get the facility that was originally approved for [$]25 million with [the Bank]", and that he had actually met with officials of the Bank and told them how he would "manage and control" the program. This would include, in addition to standard credit checks, "verifications through government bodies ... and balance sheets of accountancy companies. It was a full ... organised credit assessment depending upon the degree of money they required."

[243] It was the known expertise and experience of the appellant in the lending business, and by extension that of the respondent, which was being used to promote the respondent's prospects to the Bank. The appellant well knew this. The appellant had no reasonable basis for believing that the Bank or HIH had knowingly approved of the exiguous loan assessment procedures actually adopted by the respondent.

The business judgment rule

[244] The appellant next contends that the learned trial judge should have applied the business judgment rule (now s 180(2) of the Corporations Act) to relieve the appellant of responsibility for his failure to consider the documents which established the respondent's loan assessment procedures.

[245] The business judgment rule, initially contained in s 180(2) of the Corporations Law, was introduced by the Corporate Law Economic Reform Program Act 1999 (Cth). Section 180 of the Corporations Law came into force on 13 March 2000. Upon the enactment of the Corporations Act, the business judgment rule was retained in
s 180(2) of the Corporations Act.

[246] As has been explained above, the appellant's breach of duty was identified by the learned trial judge as being the appellant's failure, as a director of the respondent, to ensure that adequate loan application assessment procedures were established and maintained. This failure necessarily occurred before the respondent began lending money in early 1999. Because the appellant's breach began before the commencement of the provision containing the business judgment rule, any application of the business judgment rule in this case would depend on the application of the transitional provisions of the Corporations Act (see, for example, s 1400 and s 1401).

[247] In light of the findings of the trial judge in this case, however, it is not necessary to resolve the complexities of the transitional provisions. The learned trial judge did not accept that the appellant actually made "the judgment" contemplated by s 180(2) of the Corporations Act. His Honour found that:

"if Mr Dunn made a judgment to leave matters as they stood, he did not inform himself about the subject matter of it. Mr Dunn did not concern himself at all with the contents of the Austide agreement or with the administrative procedures applicable to the scheme. Nor if, which I rather doubt, he made the judgment he alleges, did he turn his mind to whether 'the judgment' was in the best interests of the plaintiff. Because CRM was denied the administration agreement, Mr Dunn washed his hands of responsibilities relating to it and in relation to the affairs of the company generally."^[118]

[248] His Honour's findings preclude any possible application of the business judgment rule. The appellant has not demonstrated any basis on which this Court should set aside those findings. Those findings were open to his Honour on the evidence. They involved an assessment of the appellant's credibility and character in relation to which this Court should defer to the judgment of the trial judge who had the advantage of seeing and hearing the appellant give evidence.^[119] The reluctance of this Court to disturb these findings of fact is strengthened by the consideration that they relate to the state of mind of the appellant.^[120]

Physical separation

[249] Another point raised by the appellant in oral argument was that the trial judge did not advert to the circumstances of the appellant's physical separation from the administration of the respondent's lending program. The appellant complained that this oversight indicated that his Honour did not appreciate that the appellant's duty to the respondent was reduced by reason of this physical separation.

[250] This criticism of the judgment is without substance. There are a number of reasons why this is so. The first is that, if considerations of physical separation impede the proper discharge of a director's duty "of acting collectively to manage the company",^[121] then the director should surrender his appointment.^[122]

[251] Secondly, in an age of electronic communication, the disadvantages of physical separation may be illusory, especially where the task in question involves the review of fundamental documentation. It is difficult to see how the appellant could have been impeded in the discharge of his duties by reason of his physical separation from the administrative centre of the loan program.

[252] Thirdly, as I have explained above, the respondent's case was not concerned with a failure to participate in the day to day operational process of the assessment and approval of loans. The appellant's point, even if it were otherwise valid, would, therefore, be quite irrelevant to the case advanced by the respondent.

[253] The trial judge's failure expressly to reject this point may be explained by its lack of substance.

"Accepted Lending Practice"

[254] On the appellant's behalf, it was contended, especially in oral argument, that the evidence did not support his Honour's conclusion that the loan application assessment procedures adopted by the respondent did not comply with "accepted lending practice". It was said on the appellant's behalf that the only evidence of accepted lending practice was that which the respondent sought to adduce from Bundesen, whose expertise in this regard the trial judge rightly rejected.

[255] The learned trial judge was of the view that the absence of elementary steps, such as the verification of receivables and the verification of the fact that the receivables had been generated by an accountant, or any inquiries directed to the ability of the borrower to service and repay the loan by way of the provision of financial statements, was a failure of the due diligence required of Austide under the administration agreement.^[123] Because the loan application assessment procedures adopted by Austide did not, in his Honour's view, measure up to the irreducible minimum standards derived from the administration agreement, no evidence of the practice of lenders was necessary to support his Honour's conclusion.

[256] In any event, the appellant's answers in the course of his public examination were that it "goes without saying" that verification of the applicant's receivables would be required in any due diligence process. To the extent that an evidentiary basis for concluding that the respondent's loan application standards fell below "accepted lending practice" was necessary, it was provided by the appellant's own admission. I would, therefore, reject the appellant's argument.

[257] This argument was, of course, directed to upsetting the trial judge's conclusion that the appellant had failed in his duty to the respondent by not alerting other members of the board to the deficiencies in the loan assessment procedures applied by Austide. As I foreshadowed in paragraph [130] above, I consider that the respondent's success on this issue is double edged. The failure of Austide to carry out "due diligence" was so abject, and at such a fundamental level, as to cast doubt on the hypothesis that an explicit prescription of such basic standards would have prevented the making of the loans. This problem will be addressed further in my discussion of the issue of causation.

Causation

[258] On the appeal, the appellant advances the broad contention that: "His Honour erred in finding that the appellant's breaches of his duty as a Director of the [respondent] were causative of its loss."^[124] A number of arguments were advanced under the rubric of this broad contention.

[259] First, the appellant argues that the learned trial judge should have found that the improvident loans would have been made and approved by either Sheers or Howes, with Ms Schweitzer's complicity, regardless of what loan assessment procedures were in place. The appellant relied upon s 1317F of the Corporations Act, and findings made by McMurdo J in ASIC v Sheers & Anor,^[125] and Dutney J in ASIC v Sheers & Howes^[126] in relation to the Jumarsh and Moss loans. In relation to the Jumarsh and Moss loans, McMurdo J found that Sheers had improperly used his position as a director of the respondent to procure the making of the loans by preferring his own interests to those of the respondent. Dutney J had made similar findings in relation to Howes. Indeed, it was found that Howes had approached Moss and urged him to apply for a loan and to mis-state, quite deliberately, the amount of the certified receivables.

[260] In relation to this particular aspect of the appellant's argument, I consider that the findings of McMurdo J and Dutney J did not establish any fraudulent complicity of Ms Schweitzer (in relation to the Jumarsh and Moss loans, much less in relation to the other loans) for the purpose of the proceedings in the present case. Moreover, to show that any of the improvident loans were procured as a result of the fraudulent activities of Sheers and Howes does not automatically exculpate the appellant. Negligence on the part of some directors may facilitate fraud by others.

[261] Secondly, the appellant submits that the evidence adduced at trial by the respondent, and from Ryland on behalf of the appellant, showed that the improvident loans would have been made, regardless of what procedures were in place, because of the fraudulent endeavours of Sheers and Howes in which Ms Schweitzer was complicit. The appellant points to the findings that Sheers approved the loans to Spiller Holdings and McCouat, and that Howes approved the loans to Venola and Moss. The appellant argues that each of the initial loans to Spiller Holdings and McCouat were approved by Sheers even though it was within Ms Schweitzer's discretion to approve them. Jumarsh, Venola and McCouat were, as Sheers and Howes knew, not accountants. In the case of the Spiller and Moss loans, Sheers and Howes knew that the receivables asserted were false.

[262] Insofar as the appellant's points rest on the evidence of Ryland, the appellant complained in his written submissions that his Honour did not deal with the evidence of Ryland. It may be noted that, when he gave evidence, Ryland had recently been released from gaol. He had been imprisoned for fraud. It is understandable that the learned trial judge may not have been disposed to act upon his evidence. In any event, these points made by the appellant do not serve to establish Ms Schweitzer's deliberate complicity in the fraudulent activities of Howes and Sheers. Nor do they necessarily establish that the breach of duty by the appellant did not facilitate the misconduct of Sheers and Howes and so contribute to the loss suffered by the respondent on the improvident loans.

[263] Thirdly, the appellant argues that even the exiguous loan assessment procedures actually administered by Austide and Ms Schweitzer should have resulted in the defaulting loans not being made. Nevertheless, the loans were made. Accordingly, the appellant argues, it follows that the making of the loans was the result, not of deficient procedures, but of Austide's failure to implement those procedures. The learned trial judge described the appellant's argument, that "[t]he cause [of the making of the defaulting loans] was Ms Schweitzer's misapplication of the existing procedures",^[127] as "unduly simplistic".^[128] His Honour accepted that "[t]he evidence establishes that there was some failure to apply the established administrative procedures in relation to each of the subject loans".^[129] Nevertheless, his Honour held that both the appellant's negligent failure to incorporate in the respondent's lending procedures "due diligence inquiries which would enable the [respondent] to be satisfied that the borrower had the financial capacity to service and repay the loan and to be satisfied that the certified debts actually existed",^[130] and his failure to ensure their implementation, "contributed ... to the entering into of the defaulting loans".^[131]

[264] In this regard, his Honour concluded:

"The inadequate loan application procedures and the general lack of rigour applied in assessing applications greatly enhanced the likelihood that bogus or unmeritorious applications would be approved. Whilst the adoption of procedures which conformed with 'accepted lending practice' may not have ensured that all such applications were detected, the prospects of detection, and deterrence, would have been substantially enhanced."^[132]

[265] The learned trial judge was correct, in my respectful opinion, to reject as "unduly simplistic" the contention that, because Ms Schweitzer's poor stewardship was "the true cause" of the making of the defaulting loans, it followed that the appellant's breach of duty was not a material cause of the making of the loans.^[133] The one does not necessarily exclude the other.

[266] There are, however, more significant criticisms of the trial judge's conclusions which fall to be addressed under the appellant's broad contention in relation to causation. The starting point for these arguments is the circumstance that his Honour did not make findings to the effect that the adoption of more explicit loan assessment procedures would have prevented the making of the improvident loans. His Honour's findings were apt to lead only to his Honour's conclusion that more explicit loan assessment procedures would have decreased the risk that improvident loans would be made.

[267] Further, as to the consequences of the appellant's failure to supervise the respondent's business more diligently, it must be borne in mind that, in December 1999, Romp and the appellant sought to have the administration of Austide audited. They were not able to have their way. There was no finding by the learned trial judge that their efforts in this regard were not sufficient to discharge their duty; and their very lack of success on this point at that stage must cast doubt on the hypothesis that earlier efforts at scrutiny of the loan program would have exposed either Ms Schweitzer's failings or the "improvidence" of Sheers and Howes.

[268] While it is no doubt true to say that deficient loan assessment procedures meant that there was a risk that unacceptably risky loans might "slip through" the respondent's decision-making process, in the present case, it is hardly realistic, having regard to what his Honour found to be the circumstances of those loans, to say that the improvident loans "slipped through" because of deficient loan assessment procedures: Sheers and Howes were involved in the making of the loans. Some of these loans were for their own benefit, and some were for persons known to them; those persons clearly did not qualify for loans and were obviously poor lending risks. For these reasons, the Court must come to a view on the balance of probabilities as to whether the improvident loans would have been made under the continuing stewardship of Austide and Sheers and Howes if more explicit procedures of loan application assessment had been adopted by the respondent.

[269] Next, his Honour did not make any findings in relation to when the respondent's board might have adopted more explicit loan assessment procedures had the appellant fulfilled his duty as a director to push for the adoption of such procedures. It may fairly be assumed that it was implicit in his Honour's findings that this would have occurred in early 1999 before the respondent's lending programs actually commenced. The same assumption cannot, however, be made in relation to when proper supervision by the appellant would have led to the implementation of standards effective to prevent the making of the loans either by Austide or its replacement as administrator of the lending program. His Honour made no finding as to when proper supervision on the appellant's part would have led to the actual enforcement of standards effective to prevent the making of the loans. Nor did his Honour make any finding as to what particular steps, which the appellant should have taken by way of proper supervision, would have led to critical improvements in loan administration or how those improvements would have prevented the making of the improvident loans. Importantly in this regard, his Honour made no finding as to the circumstances which should have prompted the appellant to inquire into Ms Schweitzer's stewardship of the respondent's business, or into the circumstances of Ms Schweitzer's interactions with Sheers and Howes in relation to the approval of loans. There was simply no evidence before his Honour which would have enabled any of these findings to be made. There was, for example, no suggestion that any information had emerged, or might have emerged upon reasonable supervision by the appellant, at some time before the loans had been fully advanced, which might have led to the replacement of Austide or the exposure of Sheers and Howes.

[270] In my respectful opinion, his Honour's findings do not warrant the conclusion that the adoption or implementation of loan assessment procedures conforming to what his Honour held to be accepted lending practice would have prevented the making of the improvident loans by the respondent. Such findings were, in my view, necessary to enable the question crucial to the resolution of the issue as to causation to be determined in the respondent's favour. In order to explain my view, I will first discuss the legal principles which control the resolution of the issue of causation. I will then seek to explain more fully my view that his Honour's findings in relation to the respondent's decisions to make the loans do not suffice to enable the question of causation to be answered in favour of the respondent. I will also add some references to other evidence which was adduced by the respondent and which has a bearing on that question. I will then discuss his Honour's findings in relation to the relevance, in terms of causation, of the failure by the respondent to remove Austide as administrator of the lending program. Finally, I will explain why I consider that the respondent failed to establish a causal relationship between the appellant's failure to ensure that accepted lending practices were maintained and the respondent's loss.

Issues of principle

[271] It may be accepted that a "sleeping sentinel"^[134] increases the risks of a robbery, but he does not cause or contribute to losses suffered from robbery if others have left an alternative route around his guard post.

[272] It may be accepted that the appellant should not escape liability for his breaches of duty merely because the defaults of other persons caused or contributed to the loss suffered by the respondent.^[135] The crucial question, in my respectful opinion, is whether one may conclude that, but for the appellant's breach of duty, the improvident loans would not have been made. It is usually necessary to establish causation to be able to say that the respondent's loss would not have been suffered but for the appellant's breach.^[136] No different approach results from the circumstance that the duty of the appellant to the respondent was equitable in nature.^[137]

[273] It must be borne steadily in mind that the appellant had no immediate involvement in the respondent's decisions to make the improvident loans. It was no part of the respondent's case that he was at fault because he was not directly involved in those decisions. The immediate causes of the making of the loans were decisions made voluntarily by Ms Schweitzer, Sheers and Howes. To say this is not to preclude the possibility of holding the appellant liable for the making of the loans and the loss suffered by the respondent as a result. It is simply to make the point that the extent to which the appellant can be held liable for that loss because of his failure properly to participate in the collective governance of the respondent requires an understanding of the relationship between the appellant's breach of duty and the decision-making which led to the improvident loans. In this regard, no act of the appellant, as opposed to his omissions, has been said to have impinged upon the respondent's decision-making process so as to make it likely that the loans would have been made. The real question is whether the appellant's omissions in terms of the collective governance of the respondent contributed to the outcome of the decision-making process that resulted in the improvident loans being made. In Medlin v State Government Insurance Commission, Deane, Dawson, Toohey and Gaudron JJ said:^[138]

"For the purposes of the law of negligence, the question whether the requisite causal connexion exists between a particular breach of duty and particular loss or damage is essentially one of fact to be resolved, on the probabilities, as a matter of commonsense and experience (See Fitzgerald v Penn [1954] HCA 74; (1954) 91 CLR 268 at 277-278; March v Stramare (E & M H) Pty Ltd [1991] HCA 12; (1991) 171 CLR 506 at 515, 522-523; Bennett v Minister of Community Welfare [1992] HCA 27; (1992) 176 CLR 408 at 412-413, 418-419, 428). And that remains so in a case such as the present where the question of the existence of the requisite causal connection is complicated by the intervention of some act or decision of the plaintiff or a third party which constitutes a more immediate cause of the loss or damage. In such a case, the 'but for' test, while retaining an important role as a negative criterion which will commonly (but not always) exclude causation if not satisfied, is inadequate as a comprehensive positive test (See, eg, March v Stramare (E & M H) Pty Ltd (1991) 171 CLR at 515-519, 522-524). If, in such a case, it can be seen that the necessary causal connexion would exist if the intervening act or decision be disregarded, the question of causation may often be conveniently expressed in terms of whether the intrusion of that act or decision has had the effect of breaking the chain of causation which would otherwise have existed between the breach of duty and the particular loss or damage. The ultimate question must, however, always be whether, notwithstanding the intervention of the subsequent decision, the defendant's wrongful act or omission is, as between the plaintiff and the defendant and as a matter of common sense and experience, properly to be seen as having caused the relevant loss or damage. Indeed, in some cases, it may be potentially misleading to pose the question of causation in terms of whether an intervening act or decision has interrupted or broken a chain of causation which would otherwise have existed. An example of such a case is where the negligent act or omission was itself a direct or indirect contributing cause of the intervening act or decision."

[274] The circumstance that the immediate cause of the making of the improvident loans was the outcome of a process of decision-making by other individuals means that it is rational to hypothesise that the improvident loans would have been made even without the appellant's omissions. The issue becomes whether the contrary hypothesis, namely that the loans would not have been made but for the appellant's omissions, is the more compelling of the competing hypotheses. In weighing these hypotheses, one must have regard to what is known of the relationship between the appellant's breaches of duty and the decisions to make the loans. Unless the latter hypothesis is the more compelling, having regard to the known facts, the respondent's case falls at this hurdle.

[275] The evidence adduced by the respondent did not enable the learned trial judge to make more comprehensive findings as to the relationship between the appellant's breaches of duty and the respondent's decision-making process than those which his Honour made. To those limited findings, his Honour applied the "increased risk of loss" approach to arrive at a conclusion on the issue of causation favourable to the respondent. In my respectful opinion, his Honour erred in applying the "increased risk of loss" approach. That is because the findings which his Honour made do not displace the hypothesis that the outcome of the respondent's decision-making process in relation to the loans would have been the same even if the appellant had not breached his duty to the respondent, in favour of the hypothesis favoured by the respondent.

[276] The learned trial judge proceeded^[139] to consider the issue of causation by reference to the "increased risk of loss" approach explained by McHugh J in Chappel v Hart.^[140] In that case, McHugh J discussed the causal nexus between breach of duty and loss in terms which focus upon the increased risk of loss flowing from the breach of duty. McHugh J said:

"Before the defendant will be held responsible for the plaintiff's injury, the plaintiff must prove that the defendant's conduct materially contributed to the plaintiff suffering that injury. In the absence of a statute or undertaking to the contrary, therefore, it would seem logical to hold a person causally liable for a wrongful act or omission only when it increases the risk of injury to another person. If a wrongful act or omission results in an increased risk of injury to the plaintiff and that risk eventuates, the defendant's conduct has materially contributed to the injury that the plaintiff suffers whether or not other factors also contributed to that injury occurring. If, however, the defendant's conduct does not increase the risk of injury to the plaintiff, the defendant cannot be said to have materially contributed to the injury suffered by the plaintiff."^[141]

[277] This passage supports a process of logical inference of a causal nexus between breach and loss. It confirms that one may logically infer, from the creation or increase in the risk of an event by reason of a breach of duty and the fact of the occurrence of the event, that the breach caused the event.^[142] This approach necessarily assumes a clear appreciation of the state of the plaintiff's exposure to risk of the loss before the effect of the defendant's misconduct is taken into account. In this case, one must take into account the following aspects of the respondent's exposure to loss from its lending business: the continuing stewardship of Austide; the continued presence of Howes and Sheers on the respondent's board; and the ability of Sheers and Howes to approve a loan or to procure its approval. The continuing stewardship of Austide and Ms Schweitzer was, on his Honour's findings, not something for which the appellant was responsible. (I note that the respondent contests this proposition, and I shall return to consider the respondent's argument in this regard in due course.) The presence of Howes and Sheers on the board and their ability to approve loans was not a matter of complaint against the appellant.

[278] It must be emphasised that the approach of McHugh J is one of logical inference of a causal link, not of a legal presumption which obviates the need for proof of a causal link.^[143] As McHugh J himself said in Commissioner of Main Roads v Jones,^[144] the approach to causation which he explained in Chappel v Hart is appropriate to cases "where the only evidence concerning causation was that the defendant had breached his duty of care and that the injury that occurred was within the scope of the risk of injury arising from the breach of duty". The inference of causation is a deduction which may logically be made in a case where the risk created or increased by the defendant's breach of duty may operate, either alone or with other risks attending particular action or enterprise, to produce the loss. But it is not a logical deduction where the evidence, either shows that the removal of the risk created by the defendant's breach of duty would not have prevented the occurrence of the loss by reason of the operation of the other attendant risks, or gives reason to regard the possibility of such a result as equally probable. The appellant cannot be held liable for the respondent's loss on the basis of mere speculation about what Austide, Howes and Sheers would have done if the respondent had adopted more rigorous loan assessment procedures.

[279] In bearing in mind the continued presence of Austide, Howes and Sheers as the respondent's decision-makers, it is necessary to acknowledge the uncertainties inherent in any assessment of the likely conduct of human beings in a hypothetical situation. In Fink v Fink,^[145] Dixon and McTiernan JJ cited with approval the observation of Vaughan Williams LJ^[146] that:

"There are cases, no doubt, where the loss is so dependent on the mere unrestricted volition of another that it is impossible to say that there is any assessable loss resulting from the breach."

[280] The decision of the respondent to dispense with Ms Schweitzer as a witness meant that the trial judge was denied the benefit of Ms Schweitzer's evidence in relation to the circumstances of the respondent's decision-making process, and the relationship between Austide's role and that of Sheers and Howes, and on the issue whether her stewardship of the loan program would have been improved by more explicit lending procedures. To say the least, the respondent's decision in this regard does not encourage the drawing of any inference favourable to the respondent on this issue.^[147] In the upshot, however, the position is that there was simply no evidence which would have enabled the trial judge to conclude that more explicit loan procedures, or proper supervision by the appellant as a non-executive director, would have led to different decisions in relation to the improvident loans.

[281] It will often be the case that a plaintiff will not be able to adduce direct evidence of the likely behaviour of a third party where proof of causation depends on the behaviour of that third party in hypothetical circumstances. It does not follow that a plaintiff will, as a result, fail to make out his or her case on the balance of probabilities. An inference may often properly be drawn as to the likely behaviour of a third party in hypothetical circumstances. The third party's self interest may point in a particular direction, or the third party's conduct may be objectively predictable as, for example, when a court determines a legal dispute.^[148] In the present case, there are no such objective considerations which might support an inference in the respondent's favour as to the behaviour of Austide or Sheers and Howes.

[282] One may accept that, as the trial judge found, the application of the loan assessment procedures implicit in the "due diligence" would have increased the prospect of exposing irregular or fraudulent applications. One may also accept that this prospect, together with the knowledge that the appellant was "active in ensuring the proper loan administrative procedures were being carried out and that Mr Taylor was exercising a properly informed supervisory role",^[149] would have had a deterrent effect to others disposed to defraud the respondent. But it is another thing to conclude that Sheers and Howes would have been made sufficiently more circumspect, and that Ms Schweitzer would have been made sufficiently more alert and stalwart in relation to Austide's assessment of loan applications, that the loans would, on the balance of probabilities, not have been made.

[283] In that regard, there is no scale of reference which one can use retrospectively to test whether the probabilities are that Ms Schweitzer or Howes and Sheers would have acted in such a way that the improvident loans would not have been made. The evidence contains significant pointers towards a contrary conclusion. In the context of his Honour's evaluation of the appellant's argument that the "true cause of the loss" was the "improper conduct of Messrs Sheers and Howes",^[150] his Honour observed that it was not "inevitable or nearly so that the defaulting loans would have been made, renewed or extended"^[151] even if the appellant had not breached his duty to the respondent. One may accept that his Honour's observations are a sufficient answer to the appellant's argument that the fraud of Sheers and Howes was the "sole cause" of the respondent's loss, but they are not a sufficient basis on which to conclude on the balance of probabilities that, but for the appellant's breach of duty, the respondent would not have made the improvident loans.

[284] Where a plaintiff's theory of causation of loss involves the hypothetical actions and decisions of other human beings, and there is evidence which bears on the probabilities as to what those hypothetical actions and decisions might have been, a court cannot reason to a conclusion on causation favourable to the plaintiff without coming to a view favourable to the plaintiff on the balance of probabilities as to the hypothetical actions and decisions of those persons. In Sellars v Adelaide Petroleum NL,^[152] Brennan J said:

"In Bennett v Minister of Community Welfare ((1992) [1992] HCA 27; 176 CLR 408, at pp 422 - 423) Gaudron J. said:

'It might be said that, where questions of causation depend on hypothetical considerations, allowance should be made, as in the assessment of damages, for the possibility that some event would not have occurred (See, in relation to the assessment of damages, Malec v J C Hutton Pty Ltd). Possibilities, if they are not fanciful, must be taken into account, at least in a general way, when ever causation or the related issue of prevention is in issue. But questions of that kind are not answered 'maybe' or, even, 'more probably than not'. They are answered 'yes' or 'no' depending on the probabilities for or against. In this respect, they are indistinguishable from the question whether an event happened (As to the 'all or nothing' approach to whether an event happened, see Malec v J C Hutton Pty Ltd (1990) 169 CLR at pp 642 - 643) where possibilities are taken into account but, once the question has been answered, those possibilities have no further bearing on the matter.'

I respectfully agree. Unless it can be predicated of an hypothesis in favour of causation of a loss that it is more probable than competing hypotheses denying causation, it cannot be said that the plaintiff has satisfied the court that the conduct of the defendant caused the loss."

[285] Similarly, in the joint judgment of Mason CJ, Dawson, Toohey and Gaudron JJ in Sellars v Adelaide Petroleum NL,^[153] it was accepted that a plaintiff must establish that the defendant's misconduct caused the loss on the balance of probabilities. In particular, their Honours said:

"When the issue of causation turns on what the plaintiff would have done, there is no particular reason for departing from proof on the balance of probabilities notwithstanding that the question is hypothetical."

[286] A finding that there would be an increase in the chances of a refusal of an application for an improvident loan if the appellant had performed his duty does not, in my respectful opinion, suffice to establish the required causal nexus between the appellant's breach of duty and the respondent's loss. I consider that the findings of fact which were essential to the respondent's case, so far as causation is concerned, are:

• first, that Austide, under the direction of Ms Schweitzer, would have been effective to prevent the making of the defaulting loans if the appellant had ensured that the loan assessment procedures adopted by the respondent explicitly called for a risk assessment of the kind referred to by the trial judge; and

• secondly, that Sheers and Howes would have refrained, or been prevented, from committing the respondent to the dubious borrowers with whom they involved the respondent.

[287] To the extent that his Honour was not able, on the evidence before him, to come to a firm conclusion as to the circumstances of the "faulty" decision-making of the respondent which led to the making of the problem loans and Ms Schweitzer's role therein, this was not a basis for reasoning by the "increased risk of loss" approach to a conclusion on the issue of causation in favour of the respondent. Rather, it identified a serious deficit in the respondent's case.

[288] In the light of these conclusions as to principle, I turn to a review of his Honour's conclusion on the causation issue.

Would more procedures in conformity with "accepted lending practice" have avoided the losses suffered by the respondent?

[289] It will be recalled that his Honour found that the appellant could have ensured the adoption of more explicit procedures by the respondent had he made an effort in that regard. There must be some question as to whether this conclusion can be sustained when one bears in mind that, by July 2000, the respondent's board was so hopelessly divided that it did not adopt, even at that time, the more prudent loan assessment measures then being proposed by the appellant and Taylor. For present purposes, however, it is convenient to address the question whether it is more probable than not that the adoption and implementation of more explicit loan assessment procedures would have avoided the losses suffered by the respondent.

[290] There is real difficulty in accepting that it is more probable than not that a hypothetical improvement in the statement or formulation of the assessment procedures to be applied by Austide would have prevented the making of loans which were approved by Howes or Sheers rather than by Austide, ie the loans to Venola, Spiller, Moss and McCouat. The fact that these loans were approved by Howes or Sheers, to whom the borrowers were known, supports the view that Austide's role was not decisive in the loan approval process even if Ms Schweitzer was not complicit in any fraudulent conduct by Howes and Sheers.

[291] When one bears in mind that Howes and Sheers stood to benefit from the loans to Jumarsh and Moss, there is further reason to doubt whether Austide was likely to have been able to prevent the making of the loans. I emphasise that it was never suggested by the respondent that the appellant was at fault in failing to take steps to ensure that Howes and Sheers should not have been able, within the respondent's business structure, to approve loans. It was no part of the respondent's case against the appellant that he breached his duty to the respondent by failing to take steps to ensure that loan applications were only approved by the board or a sub-committee thereof rather than by one director. The application of more explicit assessment procedures by Ms Schweitzer would hardly have been likely to prevent the making of loans by Sheers and Howes if they were sufficiently disposed to ensure that the loans be made. They had, on his Honour's findings, reasons to be so disposed. Any suggestion that Ms Schweitzer would have been likely to have blown the whistle on Sheers and Howes is not supported by what is known of her stewardship. Furthermore, her relationship with Sheers does not support the suggestion.

[292] It is necessary at this point to refer again to the trial judge's finding that "the directors of the [respondent] who had contact with Ms Schweitzer concerning the administration of the scheme had no expectation that" Austide would carry out a risk assessment of each applicant for a loan.^[154] Those directors included Sheers and Howes. It is clear that, for advances which exceeded Austide's lending discretion, or "borderline" loans, the approval of a director was required. As I have said above at paragraph [130] of these reasons, this requirement that a director turn his mind to whether a particular loan should be made could serve no other purpose than to ensure that a director made a judgment as to the desirability of making the loan. It was, in a sense, a form of risk assessment or risk management. There was no finding by his Honour, and no reason to think, that the improvident loans were procured or approved by Howes and Sheers because they did not understand the requirements of prudence in lending and the desirability in that regard of a risk assessment.

[293] It is not readily apparent that more explicit assessment procedures would have sufficiently discouraged Sheers and Howes to refrain from approving the improvident loans. They might have been discouraged by the prospect of being found out in due course by a liquidator or ASIC, but the reality is that their misconduct was always attended by that prospect. Whether they would have been sufficiently discouraged by some undefined, and undefinable, increase in the prospect of detection to have refrained from procuring the respondent to make the loans is not a question which admits of an affirmative answer as a matter of logical inference or evidentiary demonstration.

[294] To the extent that the appellant's breach of duty lay in failing to ensure that prudent standards should have been more explicit, there is no finding, nor any reason to infer, that Ms Schweitzer needed to be alerted to practical risks which would be readily apparent to any person with her experience in the business of lending. It is, therefore, difficult to accept that being alerted to such risks was all that was necessary to render Ms Schweitzer and Austide willing and able to take appropriate action to prevent the improvident loan applications being put forward to, and approved by, Sheers and Howes.

[295] His Honour's analysis of the causation issue does not deal with the circumstance that most of the loans were actually approved by Sheers and Howes. His Honour did not go so far as to find that Ms Schweitzer would have refused to allow loan applications to go forward to Sheers or Howes for approval, if more explicit loan application assessment standards had been in place. His Honour did not go further than saying that he was not satisfied that Ms Schweitzer would have approved a loan if she had been "alerted" to its failure to meet appropriate loan criteria or obvious risks of default.^[155]

[296] No finding more favourable to the respondent was open, at least in the absence of evidence from some credible source, supporting a finding that Ms Schweitzer would, in fact, have been "alert" to the failure of a loan to meet appropriate loan criteria or to obvious risks of default and willing and able to prevent the making of the dubious loans if more explicit standards of accepted lending practice had been in place. Having regard to Ms Schweitzer's actual conduct, and her association with Sheers, there would have been a serious issue as to the credibility of such evidence, especially if it came from Ms Schweitzer herself. As will be seen, evidence of Ms Schweitzer's conduct drawn from the respondent's loan files tends to negative such an inference.

[297] The view that Ms Schweitzer, if instructed by more explicit standards of loan assessment, would have steadfastly implemented those standards is a view which sits uncomfortably with his Honour's finding that "the inadequacy of their administration [ie that of Mr and Ms Schweitzer] ... revealed their lack of competence".^[156] Ms Schweitzer plainly failed to adhere to the exiguous standards which were expressly established. To conclude that Ms Schweitzer would have been willing and able to enforce more explicit or rigorous standards if they had been made more explicit is not a logical inference. If one buys 10 dozen eggs from a vendor and finds that the first dozen are all rotten, one will not infer that the balance are sound.^[157]

[298] Further, there was no evidentiary basis for making a finding which is, in my view, necessary for the respondent's case, namely, that Ms Schweitzer would, on the balance of probabilities, have been willing or able to prevent the making of the loans to the dubious borrowers if more rigorous standards had been explicitly incorporated in the respondent's loan assessment procedures. So long as Sheers and Howes were willing and able to exercise their power of approving loans to selected applicants who enjoyed their favour - and the applicant is not alleged to be responsible for that state of affairs - it is distinctly likely more explicit or rigorous loan assessment procedures applied by Austide were irrelevant. A finding that Ms Schweitzer would, in fact, have been willing and able to enforce more explicitly rigorous standards, if that were contrary to the wishes of Sheers and Howes, is not a finding which his Honour was able to make.

[299] More explicit precautions in the respondent's loan application assessment procedures could only serve their intended purpose if they were likely to alter Ms Schweitzer's conduct, either by alerting her to an issue in relation to borrowing of which she was unaware or to draw her attention to something she might have overlooked or forgotten.^[158] There were, in the applications of the defaulting borrowers, discrepancies or deficiencies readily apparent, either in terms of the procedures which the respondent did apply, or in terms of ordinary prudence. It will be seen that some discrepancies or deficiencies were actually noted by Ms Schweitzer; but these discrepancies or deficiencies did not lead to a refusal of the application.

[300] I have already observed that the improvements in lending procedures regarded by the trial judge as necessary to achieve "accepted lending practice" were very basic indeed. They would have been no more than making explicit what his Honour held was involved in Austide's contractual obligations in respect of "due diligence". The improvements in procedures would have consisted of an explicit requirement for the verification of receivables and the provision of financial statements (to afford some basis for a view that the borrower had the capacity to service and repay the loan), and confirmation that the applicant was an accountant and that the receivables were owed to him or her as such. It was on the basis that such measures fell within the most undemanding understanding of what is involved in "due diligence" that the appellant and the other directors of the respondent were found to have breached their duty to the respondent.^[159]

[301] The sharp edge of that conclusion as to the nature of the appellant's breach, for the respondent, is that, on the issue of causation, it tests credulity too far to conclude Ms Schweitzer or Sheers and Howes would not have been well aware that lending without such steps was very imprudent. No-one in the business of lending money needs to be alerted to such obvious and fundamental measures for minimising defaulting loans as a requirement of prudent lending. These measures were not such as could be derived only from expert knowledge or technical insight. There may, of course, be differences of opinion as to the extent of scrutiny and the levels of acceptable risk, return and security in relation to different kinds of lending business. But the respondent's case was not concerned with such differences. The appellant's failure was related to the total absence of basic and obvious inquiries in terms of risk assessment. The proposition that Ms Schweitzer might have prevented the making of the improvident loans had she been made aware of the need to make such fundamental inquiries presupposes that she needed to be alerted to them, and that it was the lack of commercial common sense at this basic level that led to the approvals by Howes and Sheers. In my respectful opinion, in the absence of evidence on which findings of fact could be made about these aspects of the respondent's decision-making process, these presuppositions test credulity too far.

[302] In that regard, in Chappel v Hart,^[160] Rosenberg v Percival^[161] and Commissioner of Main Roads v Jones,^[162] it is emphasised that courts must be alert to "the danger involved in considering warnings without making due allowance for the distorting effects of litigious hindsight".^[163] In the last-mentioned case, Gleeson CJ referred^[164] to evidence of the cavalier conduct of a driver of a motor vehicle who had ignored warning signs before the occurrence of the accident in which he was injured. Gleeson CJ said that this evidence provided objective support for the conclusion that the likelihood that the driver would have responded to a further warning immediately before the accident was "remote". Similarly, McHugh J said^[165] that the driver's "cavalier disregard of the speed limits governing his journey" meant that:

"It may or may not have been open to the trial judge to make a positive finding that [the driver] would not have been influenced by a [further warning sign] or obeyed an 80 km/h sign. But however that may be, it was not open to the Full Court to find that he would have acted in accordance with either of such signs." (emphasis in original)

[303] In Commissioner of Main Roads v Jones, Callinan J said:^[166]

"This was not a case in which cause could be inferred from the result, that is the collision. In the dictum of Gaudron J in Bennett ((1992) [1992] HCA 27; 176 CLR 408 at 420), upon which Steytler J relied, there is reference to a statement by Dixon J in Betts v Whittingslowe ((1945) [1945] HCA 31; 71 CLR 637 at 649), a case of breach of statutory duty, to the effect that the breach coupled with the fact of an accident of the kind that might thereby be caused, is enough to justify an inference that in fact the accident occurred owing to the breach. But contained within that statement is the important qualification of an 'absence of any sufficient reason to the contrary'.
In my opinion in this case there were sufficient, indeed overwhelming reasons to the contrary. The most important is that the appellant's speed averaged at least 135 km per hour throughout his journey. Self evidently he must have either ignored or overlooked speed limit signs which were in place, and the overall State speed limit in order to achieve that average speed. As an experienced traveller in the area, a matter to which the majority in the Full Court accorded no relevant and sufficient weight, he chose to maintain that average speed through country and on a highway over which he must have known animals both domestic and feral strayed.
The majority made a further error: in preferring and giving almost conclusive weight to the evidence of the respondent's wife, and his passenger who was asleep at the time of the accident, that the respondent was a careful driver responsive to road signs, in the teeth of the inexorable arithmetic of the distance that he travelled over the time elapsed. The admissibility of the wife's and passenger's evidence was not the subject of any objection, but assuming it to be admissible little probative value could possibly be attached to it in the circumstances.
In Rosenberg v Percival ((2001) [2001] HCA 18; 205 CLR 434) I counselled against too ready an acceptance of a plaintiff's evidence, given after the event, that had she been informed of a risk, even a slight one, subsequently realised, she would have elected not to take it (Rosenberg [2001] HCA 18; (2001) 205 CLR 434 at 504 - 505 [221]). Unfortunately the respondent in this case could give no useful evidence of any kind as to what he would have done in relation to signage because of the serious and disabling injuries that he suffered. But his inability to do so could provide no warrant for the drawing of an inference that he would have heeded a warning sign or signs in the light of the other, compelling evidence and inferences to the contrary to which I have referred."

[304] In Hoyts Pty Ltd v Burns,^[167] McHugh, Gummow, Hayne and Callinan JJ made the point that greater awareness of risks does not necessarily lead to a change of conduct on the part of persons confronted by those risks.

[305] In the light of these observations, and the evidence to which reference has already been made, it is proper to regard with scepticism the proposition that Ms Schweitzer was always willing and able to ensure that loan applications complied with the respondent's lending criteria whatever the wishes of Sheers and Howes, and that all that she needed to make her an effective steward was explicit instruction to decline applications from those applicants who were unable to produce verification of their receivables or financial statements indicating some ability to service and repay loans. There is evidence, in addition to that referred to by the trial judge, which strengthens one's reluctance to make findings in favour of the respondent which the trial judge did not make. To a summary of that evidence I now turn.

Further evidence relating to Austide and the defaulting loans

[306] The detail of this summary is drawn from the evidence of Bundesen whose historical account the learned trial judge regarded as a useful summary of the circumstances of the improvident loans.^[168] Bundesen's report, and the files of the respondent on which it was based, were adduced by the respondent.

[307] In relation to the Jumarsh loan, no ASIC search was carried out. If an ASIC search had been carried out in relation to Jumarsh, it would have revealed that Sheers was a director of that company. The failure to conduct such a search was of a piece with Austide's failure to conduct an ASIC search in relation to the Spiller loan. It may, therefore, not have been omitted for the sinister reason of concealing Sheers' involvement with Jumarsh from other directors of the respondent. But, however that may be, Austide's failure to conduct an ASIC search of Jumarsh was a failure to carry out an elementary and minimal requirement of the due diligence process which was in place. No explanation for that failure appears from the evidence which might support the conclusion that Ms Schweitzer could be relied upon to enforce any standards adopted by the respondent in the circumstances which existed when the improvident loans were made.

[308] Further in relation to the Jumarsh loan, on 29 October 1999, Romp wrote to Ms Schweitzer inquiring as to whether Jumarsh was a registered accounting practice and asking for confirmation that its directors were practising accountants. Ms Schweitzer replied on 3 November 1999 to the effect that Michael Norton-Smith was the sole practising practitioner, but was not a director because he was "presently under a disability". That is how Ms Schweitzer chose euphemistically to refer to the fact of Michael Norton-Smith's bankruptcy. There were five extensions of the Jumarsh loan made after this correspondence. To expect that the performance of Ms Schweitzer, or, indeed, of Sheers and Howes, was related to the respondent's standards of assessment, and might have been improved by an improvement in those standards, would truly represent a triumph of hope over experience.

[309] In relation to the Venola borrowings, Venola applied for an extension on 22 November 1999. It listed receivables totalling $1,677,889, but the application was accompanied by an "Asset and Liability Statement of D J Loane Group of Companies as at 19th November 1999". This statement showed a combination of work in progress and receivables/debtors at only $450,000. Venola's application sought to increase the facility to $1,000,000. Venola also advised Ms Schweitzer that the funds previously borrowed by Venola had largely been spent on improving a motel at Kingscliff. Ms Schweitzer sent a facsimile to Venola on 25 November 1999. In that facsimile, she advised Venola that the request for an increase to $1,000,000 had been referred to two directors of the respondent and asked Venola to supply a full list of aged debtors but no action was taken to call up the loan notwithstanding the readily apparent, and gross, overstatement of receivables. That this was so amply supports his Honour's view of the incompetence of Austide and Ms Schweitzer. But more importantly for present purposes, it casts further doubt on the assumption that the adoption of more rigorous loan assessment standards would have actually improved the stewardship of Austide and Ms Schweitzer. It is apparent from this incident that Ms Schweitzer's problem was not that she was incapable of identifying obvious problems with borrowings. Plainly, she was sufficiently "alert" to problems with borrowings that would have been apparent to any interested person receiving the same information; but equally plainly there was a serious problem in translating this "alertness" into executive action for the benefit of the respondent.

[310] In relation to the Spiller application, no ASIC search was conducted. The CRAA search showed that the principal activity of Spiller was not the practice of accountancy. It seems, according to Bundesen's report, the issue whether the loan was actually to be made to Spiller or Ryland was recognised in the course of the assessment of the application, but not investigated further. No attempt was made to determine whether the receivables listed were fees rendered by an accountant. This was a significant omission. It was particularly important to the respondent that an applicant's receivables were professional fees rendered by an accountant to a client. That is because the policy of insurance issued by HIH provided cover in respect of loans up to a maximum of 80 per cent of fees defined as fees rendered by an accountant to a client in accordance with the standards of professional practice set down by the various professional bodies.

[311] In relation to the Moss application, Ms Schweitzer did not even ensure that the application assessment form was completed. Once again, a failure by Ms Schweitzer to observe such a basic requirement of the loan application assessment procedures casts doubt on the thesis that Ms Schweitzer's inadequate performance was the result of the absence of more explicit or rigorous lending requirements.

Could the appellant have procured the removal of Austide and thereby prevented the loss?

[312] It will be recalled that the trial judge found that the appellant could not have secured the removal of Austide as administrator of the loan program. The respondent argued that this finding should be understood as limited to the possibility of having Austide removed in favour of CRM. The respondent contended that the appellant might have procured the removal of Austide and its replacement by a competent administrator other than CRM.

[313] The first thing to be said about this argument is that, even if one were to regard the trial judge's finding in favour of the appellant as limited in the way for which the respondent contends, it would remain the case that the respondent does not have the benefit of a finding which would support its contention. Importantly, it does not have the benefit of a finding that the appellant could have procured the removal of Austide in time to prevent some or all of the improvident loans being made.

[314] Furthermore, when one refers to the respondent's statement of claim, one sees that the case made in relation to what the appellant should have known of the incompetence of Austide and Ms Schweitzer as administrator of the loan program was very limited. The relevant allegation was contained in paragraph 97 of the respondent's statement of claim. It was in the following terms:

"At all material times from in or about late December 1999 or by no later than April 2000, [the appellant] was aware that the administration of the Programme was not being conducted in accordance with accepted lending practice ...
The awareness of [the appellant] arose from the following:

(a) his receipt from Taylor of a memo relating to a meeting which had been held on 16 November 1999 attended by Taylor, Norm Allen and [Ms Schweitzer]. That meeting decided that [Austide] would be able to accept the receivables shown on the applications for extension and variation without reference to earlier data provided;

(b) his receipt from Howes of a facsimile dated 18 February 2000 attaching an internal memorandum referring to a proposal to obtain lists of aged debtors at the time of new applications;

(c) his receipt of a facsimile from Taylor dated 6 April 2000 which stated:

'List of Aged Debtors - We do not believe that there should be a need for clients to provide details of the accounts receivables at the time of making an application for the loan.'

[315] There can be no doubt that, in early 1999, an argument by the appellant to the board that Austide was incompetent, and that it should be replaced because of Ms Schweitzer's insufficient lending experience, would not have overcome the preferences of most members of the board for Austide as administrator as at the commencement of the loan program. Bearing in mind Austide's incumbency, the appellant would have had to cite examples of Austide's poor stewardship, and there is no suggestion that they were then available. The examples cited by the respondent in paragraph 97 of its statement of claim relate to the period from late 1999 to early 2000. His Honour made no finding that the appellant could have persuaded the board to remove Austide in favour of another administrator on the grounds of the examples of incompetence particularised in paragraph 97 of the statement of claim. The respondent did not suggest that there were other acts or omissions on Austide's part which the appellant could and should have raised with the other directors as a basis for the removal of Austide and its replacement by another administrator.

[316] There was a substantial question mark over the appellant's ability to procure the adoption of the more rigorous procedures which he was then bound to oversee. The prospects of removing Austide and installing an effective administrator were even more doubtful. There was evidence which suggested that Taylor had a high regard for Ms Schweitzer's competence as did Romp. Taylor's vote was critical to control of the respondent's board of directors once Romp became aligned with the appellant. His Honour made no finding as to when Romp and Taylor might have become sufficiently concerned by Ms Schweitzer's performance to support Austide's removal: the evidence simply did not permit him to do so.

[317] For these reasons, the contention which the respondent now advances should, in my respectful opinion, be rejected.

Maintaining accepted lending practice and the prevention of the loans

[318] The trial judge concluded that the "principal failure" of the appellant and the other directors "lay in not ensuring that the terms and conditions of loan and the administrative procedures were [designed] such as to minimise the risk of defaults by borrowers".^[169] His Honour's findings in relation to the appellant's breach of duty also allude, however, to the appellant's failures to ensure that appropriate lending procedures were "implemented and maintained".^[170] It is, therefore, necessary to consider the sufficiency of this finding as a support for his Honour's conclusion in relation to causation.

[319] The principal difficulty for the respondent here is that any breach of a director's duty of supervision necessarily involves a failure over time properly to oversee the performance of the company's executives. A director is not obliged to assume that the company's executives are either unable, or not disposed, to perform their duties. In the present case, the full amount of the improvident advances had been outlaid by May 2000. His Honour made no finding that proper supervision with a view to maintaining proper standards would have been apt to ensure that deficiencies in Austide's "due diligence" would have been discovered before that time so as to prevent any of the improvident loans being made.

[320] Furthermore, the circumstance that a non-executive director is broadly entitled to rely upon the honesty and competence of a corporation's executives in the absence of reason to be on his or her guard invites attention to the question to the circumstances which, it is said, should have alerted the appellant to the possible absence of basic prudence and regard for established lending procedures in the respondent's lending practices.

[321] The learned trial judge made no finding in this regard. That is hardly surprising, given the absence of any attempt by the respondent to plead a case in that regard. The closest the respondent came to pleading the necessary factual basis for such a case is paragraph 97(c) of its statement of claim. But that relates to information in April 2000. It must be acknowledged that any attempt by the appellant to have the board recognise the imprudence of the aspect of the respondent's lending procedures there in question might well have been rebuffed. In any event, even if the appellant had been spurred to a course of agitation which would have been likely to result in a tightening of procedures, it cannot be said that this result would have been achieved in time to prevent any of the improvident loans being made. To seek to establish a causal nexus between a failure of proper supervision of loan assessment procedures and the making of the improvident loans is to pile uncertainty upon uncertainty. This aspect of the respondent's attempt to sustain the judgment must also be rejected.

Summary in relation to causation

[322] For these reasons, I consider that the trial judge's conclusion - that the appellant's breach of duty caused the loss suffered by the respondent on the improvident loans - cannot be sustained.

[323] I have not reached this view on the basis that the fraudulent misconduct of Sheers and Howes was the sole cause of the respondent's loss, nor because I consider that the learned trial judge erred in failing to find that Ms Schweitzer was complicit in the fraudulent activities of Howes and Sheers. Rather, I have reached this conclusion because I consider that one cannot say that, but for the absence of the loan assessment procedures involved in what his Honour found to be "accepted lending practice", the improvident loans would not have been made.

[324] The findings which his Honour made, and the evidence adduced by the respondent, do not support the conclusion that it was more probable than not that Ms Schweitzer would, in fact, have been an effective steward of the respondent's funds if the standards of due diligence which his Honour found to be involved in "accepted lending practice" had been made more explicit. Further, in my respectful opinion, one cannot conclude that it is more probable than not that Sheers and Howes would have deferred to Ms Schweitzer, even if the respondent's lending procedures had explicitly conformed with "accepted lending practice", or that Sheers and Howes would have refrained from the improvident decision-making which led to the respondent's loss.

[325] Nor can one conclude that proper supervision of the respondent's affairs by the appellant as a non-executive director would have led to the removal of Austide as administrator or prevented the making of the improvident loans.

Conclusion and orders

[326] It will be apparent that I have rejected the appellant's attempt to overturn the learned trial judge's findings in relation to breach of duty. On the other hand, because I consider that the learned trial judge's conclusion in relation to causation in favour of the respondent cannot be sustained, I have concluded that the appeal must be allowed.

[327] The judgment below should be set aside and the respondent's action against the appellant should be dismissed.

[328] The respondent must pay the appellant's costs of the action and of the appeal to be assessed on the standard basis.

[329] WILSON J: I have read the reasons for judgment of Williams and Keane JJA, and agree with the orders they propose. I respectfully adopt Keane JA’s thorough analysis of the trial judge’s factual findings and the issues at trial, and his reasons for upholding the trial judge’s conclusion that the appellant breached duties of care which he owed to the respondent at common law and in equity. I shall confine my observations to the issue of causation.

[330] The trial judge made careful findings in relation to the improvidence associated with each of the five loans, the borrowers’ relationships inter se and their relationships with Howes and Sheers, and the extent of the fraud of Howes and Sheers. Those findings are fully set out in the reasons for judgment of Keane JA at paras [203] – [217].

[331] The loans’ non-conformity with the respondent’s lending scheme could not have been more basic: in two cases, there was no accountancy practice and in all cases the certification of receivables was false. A thumbnail sketch of the loans is as follows:-

(a)	Jumarsh Pty Ltd

Three advances were made - $342,000 on or about 12 March 1999, $100,000 on 14 July 1999 and $400,000^[171] on 8 September 1999. The initial application was witnessed by Sheers at a time before he became a director. It appears that the first advance was made before it was officially approved: Romp approved the loan on 22 or 23 March 1999.^[172] It was made before the respondent’s formal agreement with Austide Pty Ltd, but nothing turned on this as Austide’s involvement dated from November 1998. Michael Norton-Smith, one of Jumarsh’s principals, was an accountant, but bankrupt, and Sheers knew that the certification of his receivables was false. The purpose of the loan was to relend to Howes and companies in which Sheers had an interest.^[173]

(b)	Venola Pty Ltd

Two advances were made - $350,000 in May 1999 and $450,000 on 22 July 1999. The initial advance was made before Sheers became a director and before the respondent’s formal agreement with Austide Pty Ltd. It was approved by Howes. Venola had no association with an accountancy practice; the certification of receivables was false. Darryl Loane, the sole director of Venola, was known to Sheers and/or Howes.^[174]

(c)	Spiller Holdings Pty Ltd

Four advances were made - $143,500 on 17 June 1999, $102,500 on 14 July 1999, $80,000 on 6 October 1999 and $276,000 on 24 February 2000. The sole director of Spiller Holdings was David Ryland. The initial advance was approved by Sheers after his appointment as a director. Spiller Holdings had no association with an accountancy practice; the certification of receivables was false.^[175]

(d)	Garry Moss

Three advances were made - $350,000 on 21 October 1999, $300,000 on 17 November 1999 and $85,000 on 28 April 2000. The initial advance was approved by Howes. Moss became self-employed as an accountant three days after he signed the application form. In support of the application he submitted information which was false, to the knowledge of Howes. Sheers, or both Sheers and Howes stood to benefit financially from the loan.^[176]

(e)	John McCouat

Two advances were made - $100,000 on 19 April 2000 and $700,000 on 15 May 2000. The initial advance was approved by Sheers. McCouat had only recently joined the National Institute of Accountants and taken out professional indemnity insurance, and his certification of receivables was false.^[177]

[332] One or other of Howes and Sheers or both of them were intimately associated with the approval of each of the loans. They both stood to benefit financially from two of the loans.^[178] Sheers knew that false information was supplied in relation to one of the loans,^[179] Howes participated in the fraudulent application in another,^[180] and it was probable that Sheers knew false information had been supplied in respect of other loan applications.^[181]

[333] Each loan was approved by one of the directors (four of them by Howes or Sheers), but it was not the respondent’s case that the appellant was at fault because a single director could approve a loan. The full amount of those loans was advanced by 15 May 2000 – that is, before the board meeting of 17 May 2000 attended by the appellant when it was agreed to form a committee to make recommendations about imposing more stringent requirements for advances (a resolution never implemented), and it was not part of the respondent’s case that action taken after this time could have saved the position.

[334] It was not the respondent’s case that Ms Schweitzer was complicit in the fraud. The trial judge considered that the evidence did not establish that she had participated in any misconduct in relation to the Venola, Spiller, Moss and McCouat loans.^[182] His comment that the evidence did not disclose that she would have approved an application had she been alerted to its failure to meet loan criteria or the existence of obvious risks of default^[183] is difficult to comprehend in the context of such fundamental non-conformity with the respondent’s lending scheme and his findings about her incompetence.^[184] While each of the loans was approved by a director, the evidence plainly established that Austide failed to conduct adequate due diligence inquiries with respect to each of them.^[185]

[335] The trial judge’s findings that the appellant breached his duty as a director focus on his failure to recognize and take steps to remedy the inadequacies of Austide’s procedures and their implementation. It is pertinent to recall those findings, as they form the critical substratum from which his Honour reasoned that the breaches were causative of the respondent’s loss - in essence because the breaches increased the risk that the respondent would suffer loss of the kind that eventuated and materially contributed to that loss.^[186]

(a) The appellant failed to ensure that the scheme was set up so as to comply with accepted lending practice: a set of procedures to conduct inquiries and obtain evidence with a view to ensuring applicants had the capacity to service and repay loans was not established.^[187]

(b) The appellant did not apply himself to identifying deficiencies in the administration of the scheme with a view to remedying them: due diligence inquiries were not conducted; there was no independent proof of debts as certified; there was no system for considering fluctuations in the amounts of the debts.^[188]

(c) The appellant failed to detect Austide’s inability to establish sound procedures. This was as a result of his failure to involve himself in these matters. Although the two Schweitzers appeared sufficiently qualified, they were incompetent in the way in which they set up the scheme.^[189]

(d) The appellant failed to cause the respondent’s board to replace Austide, or at least to put a reasoned submission before the board. It was probable the board could have been persuaded to oblige Austide to adopt criteria and procedures calculated to minimise the risk.^[190]

[336] The trial judge concluded that, had proper procedures been in place, it would have been more difficult for loans to be made to borrowers lacking proven capacity to repay, and more difficult for borrowers to satisfy the pre-conditions for a successful application. The resultant increased prospect of exposing irregularities and fraud, and the knowledge that the appellant was ensuring proper loan administration procedures were being carried out and that Taylor (another director and company secretary) was exercising a properly informed supervisory role would have been deterrents to directors inclined to act dishonestly.^[191]

[337] In Bennett v Minister of Community Welfare^[192] Mason CJ, Deane and Toohey JJ said^[193] –

“In the realm of negligence, causation is essentially a question of fact, to be resolved as a matter of common sense.^[194] In resolving that question, the ‘but for’ test, applied as a negative criterion of causation, has an important role to play but it is not a comprehensive and exclusive test of causation; value judgments and policy considerations necessarily intrude.^[195]”

In the same case Gaudron J said^[196] –

“Leaving aside cases involving some positive act and those in which an omission can be treated as a positive act, a case based on omission or a failure to act will, in certain respects, fall for analysis in a way that differs from that appropriate for a case based on a positive act. Thus, in the case of a positive act, questions of causation are answered by reference to what, in fact, happened. In the case of an omission, they are answered by reference to what would or would not have happened had the act occurred.^[197] In that exercise, the larger philosophical questions are brushed aside and the issue is approached on the basis that ‘when there is a duty to take a precaution against damage occurring to others through the default of third parties or through accident, breach of the duty may be regarded as materially causing or materially contributing to that damage, should it occur, subject of course to the question whether performance of the duty would have averted the harm’ ^[198] .”

This is the approach to be adopted both to the appellant’s breaches of his duty at common law and to his breaches of his duty in equity.^[199]

[338] It was for the respondent to establish causation on the balance of probabilities. If it was more probable, or equally probable, that the loans would have been made regardless of the appellant’s omissions, then the respondent’s case must fail.

[339] The trial judge concluded^[200] –

“Here loss through fraudulently obtained loans was ‘the very kind of thing likely to happen as a result of the [appellant’s] negligence’ if appropriate lending procedures were not implemented and maintained. [The appellant], by his breaches of duty in respect of fundamental aspects of the [respondent’s] business, increased the risk that the [respondent] would suffer loss of the kind that eventuated and materially contributed to it loss.
For the above reasons, I consider that [the appellant’s] breaches of his duty as a director of the [respondent] were causative of its loss.”

[340] His Honour had earlier quoted the following passage from the judgment of McHugh J in Chappel v Hart^[201] –

“Before the defendant will be held responsible for the plaintiff's injury, the plaintiff must prove that the defendant's conduct materially contributed to the plaintiff suffering that injury. In the absence of a statute or undertaking to the contrary, therefore, it would seem logical to hold a person causally liable for a wrongful act or omission only when it increases the risk of injury to another person. If a wrongful act or omission results in an increased risk of injury to the plaintiff and that risk eventuates, the defendant's conduct has materially contributed to the injury that the plaintiff suffers whether or not other factors also contributed to that injury occurring. If, however, the defendant's conduct does not increase the risk of injury to the plaintiff, the defendant cannot be said to have materially contributed to the injury suffered by the plaintiff.”

[341] In my respectful opinion true analysis and application of what McHugh J said does not lead to the conclusion reached by the trial judge.

[342] The appellant could not be found liable unless his omissions increased the risk of the loss sustained. Had the only evidence of causation been that he had breached his duty and that loss within the scope of risk arising from the breach had been sustained, his Honour could have inferred that the breach caused the loss. But if the loss would have occurred notwithstanding the breach, such an inference could not be drawn.^[202]

[343] As Keane JA has observed,^[203] the immediate causes of the making of the loans were decisions voluntarily made by Ms Schweitzer, Sheers and Howes. How would those people have behaved but for the appellant’s defaults? Was there evidence from which the inference that they would have acted differently could be drawn?

[344] The trial judge said^[204] –

“It may be accepted that, had proper procedures been in place, Messrs Howes and Sheers may nevertheless have attempted to obtain benefits from the making of loans. It does not follow, however, that it was inevitable or nearly so that the defaulting loans would have been made, renewed or extended. Nor does it follow that any loan made for the benefit of them would have become a defaulting loan.”

I respectfully disagree with what his Honour said in the second and third sentences. In my view there was powerful evidence from which it could be inferred that it was at least equally probable that the five loans would still have been made. First there was the fact that the existing loan procedures, such as they were, were not followed.^[205] It is not clear whether Ms Schweitzer’s failings stemmed from lack of ability, carelessness or some other cause. She had considerable experience in the finance industry, but whether that experience was more than ministerial in character is not clear. One should be cautious in drawing conclusions from the mere fact of her de facto relationship with Sheers, especially when she was not alleged to have been complicit in the fraud and the trial judge did not make any finding whether she knew of it. Nevertheless, it would be reasonable to infer that that relationship would have made it more difficult for her to have exposed Sheers’ and Howes’ conduct to the other directors. Then there was the extent of Sheers’ and Howes’ involvement in each of the loans. Their conduct was free, deliberate and informed, and intended to exploit the situation created by the appellant’s omissions.^[206] It would be reasonable to infer that they would have applied the same determination in subverting more rigorous procedures.

[345] For the foregoing reasons I consider that the trial judge erred in his conclusion on causation.

^[1] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [1] .

^[2] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [17]  - [20].

^[3] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [1] .

^[4] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [1]  - [3].

^[5] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [4] .

^[6] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [5] .

^[7] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [130] .

^[8] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [9] .

^[9] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [6] .

^[10] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [18] .

^[11] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [22] .

^[12] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [22] .

^[13] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [25] .

^[14] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [24] .

^[15] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [27]  - [28].

^[16] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [28] .

^[17] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [29]  - [30].

^[18] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [28] .

^[19] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [31] .

^[20] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [31] .

^[21] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [32] .

^[22] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [33] .

^[23] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [34]  - [35].

^[24] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [36] .

^[25] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [38] .

^[26] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [38] .

^[27] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [40] .

^[28] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [57] .

^[29] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [84] .

^[30] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [58] .

^[31] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [2] .

^[32] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [82]  - [83].

^[33] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [61] .

^[34] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [61] .

^[35] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [79] .

^[36] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [81] .

^[37] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [43] .

^[38] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [44]  - [46].

^[39] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [64] .

^[40] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [66]  - [68].

^[41] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [70]  - [72].

^[42] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [69] .

^[43] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [65] .

^[44] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [65] .

^[45] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [88] .

^[46] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [89] .

^[47] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [92] .

^[48] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [93] .

^[49] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [94]  - [97].

^[50] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [98]  - [100].

^[51] Abalos v Australian Postal Commission [1990] HCA 47; (1990) 171 CLR 167 at 178.

^[52] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [106] .

^[53] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [106] .

^[54] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [106] .

^[55] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [106] .

^[56] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [59] .

^[57] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [60] .

^[58] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [58] .

^[59] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [57] .

^[60] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [57] .

^[61] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [61] .

^[62] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [64] .

^[63] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [64] .

^[64] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [69] .

^[65] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [69] .

^[66] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [69] .

^[67] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [72] .

^[68] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [72] .

^[69] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [78] .

^[70] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [84] .

^[71] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [97] .

^[72] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [100] .

^[73] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [107] .

^[74] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [127] .

^[75] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [138] .

^[76] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [133] .

^[77] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [131] .

^[78] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [131] .

^[79] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [131] .

^[80] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [132] .

^[81] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [132] .

^[82] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [139] .

^[83] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [144] .

^[84] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [143] .

^[85] This summary of the findings in relation to Jumarsh is principally drawn from Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [109]  - [112].

^[86] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [109] .

^[87] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [111] .

^[88] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [112] .

^[89] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [112] .

^[90] This summary of the findings in relation to Venola is principally drawn from Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [113]  - [116].

^[91] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [113]  - [116].

^[92] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [111] .

^[93] This summary of the findings in relation to Spiller is principally drawn from Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [117]  - [119].

^[94] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [117]  - [119].

^[95] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [119] .

^[96] This summary of the findings in relation to Moss is principally drawn from Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [120]  - [121].

^[97] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [120] .

^[98] This summary of the findings in relation to McCouat is principally drawn from Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [122]  - [123].

^[99] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [123] .

^[100] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [122] .

^[101] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [125] .

^[102] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [124] .

^[103] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [141] .

^[104] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [142] .

^[105] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [126] .

^[106] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [142] .

^[107] (1995) 37 NSWLR 438 at 505.

^[108] [2002] NSWSC 171; (2002) 41 ACSR 72 at 166 - 167 [372].

^[109] [2003] NSWSC 85; (2003) 44 ACSR 341 at 352 [49].

^[110] Daniels v Anderson (1995) 37 NSWLR 438 at 505.

^[111] Gould and Birkbeck and Bacon v Mount Oxide Mines Ltd (in liq) [1916] HCA 81; (1916) 22 CLR 490 at 531; Daniels v Anderson (1995) 37 NSWLR 438 at 500 - 505.

^[112] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [64] .

^[113] Francis v United Jersey Bank 432 A 2d 814 (NJ 1981) at 821 - 823; Daniels v Anderson (1995) 37 NSWLR 438 at 502 - 504.

^[114] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [84] .

^[115] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [84] .

^[116] Daniels v Anderson (1995) 37 NSWLR 438 at 502 - 504.

^[117] Permanent Building Society (In Liq) v Wheeler (1994) 11 WAR 187 at 239 - 241.

^[118] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [106] .

^[119] Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 at 126 - 127 [24] - [25]; Commissioner of Main Roads v Jones [2005] HCA 27; (2005) 79 ALJR 1104 at 1106 [10], 1117 - 1118 [72].

^[120] Clark Boyce v Mouat [1994] 1 AC 428 at 436 - 437.

^[121] Daniels v Anderson (1995) 37 NSWLR 438 at 505.

^[122] Daniels v Anderson (1995) 37 NSWLR 438 at 503.

^[123] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [61]  - [64].

^[124] Appellant's Notice of Appeal, paragraph [33].

^[125] [2003] QSC 474.

^[126] [2003] QSC 270.

^[127] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [127] .

^[128] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [131] .

^[129] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [131] .

^[130] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [131] .

^[131] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [131] .

^[132] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [132] .

^[133] March v E & M H Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506 at 517 - 518.

^[134] Cf Francis v United Jersey Bank 432 A 2d 814 (NJ 1981); Daniels v Anderson (1995) 37 NSWLR 438 at 503.

^[135] Cf March v E & M H Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506 at 517 - 518; Bennett v Minister of Community Welfare [1992] HCA 27; (1992) 176 CLR 408 at 492; Medlin v State Government Insurance Commission [1995] HCA 5; (1995) 182 CLR 1 at 6 - 7.

^[136] March v E & M H Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506 at 515 - 516, 519, 522 - 525, 530, 534.

^[137] Permanent Building Society (In Liq) v Wheeler (1994) 11 WAR 187 at 243 - 248.

^[138] [1995] HCA 5; (1995) 182 CLR 1 at 6 - 7 (citations footnoted in original).

^[139] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [135] .

^[140] (1998) 195 CLR 232.

^[141] (1998) 195 CLR 232 at 244 - 245 (internal citations omitted).

^[142] See also Betts v Whittingslowe [1945] HCA 31; (1945) 71 CLR 637 at 649; Bennett v Minister of Community Welfare [1992] HCA 27; (1992) 176 CLR 408 at 442 - 443.

^[143] For the presumptive causal link approach, see the decision of the Supreme Court of Canada in Hollis v Dow Corning Corporation (1995) 129 DLR (4th) 609 esp at 638 - 641.

^[144] [2005] HCA 27; (2005) 79 ALJR 1104 at 1109 [26].

^[145] [1946] HCA 54; (1946) 74 CLR 127 at 143.

^[146] Chaplin v Hicks [1911] 2 KB 786 at 792 - 793.

^[147] Cf Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298.

^[148] Stapleton, Cause-in-fact and the scope of liability for consequences (2003) 119 LQR 388 at 404 fn 81.

^[149] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [139] .

^[150] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [138] .

^[151] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [139] .

^[152] (1994) 179 CLR 332 at 367 - 368 (citations footnoted in original).

^[153] (1994) 179 CLR 332 at 353. See also 353 - 355.

^[154] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [57] .

^[155] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [143] .

^[156] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [65] .

^[157] Russell, History of Western Philosophy, 2nd Ed 1961 Routledge London at p 668.

^[158] See Vairy v Wyong Shire Council [2005] HCA 62; (2005) 80 ALJR 1 at 6 [7].

^[159] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [64] .

^[160] (1998) 195 CLR 232 at 246 and 272.

^[161] [2001] HCA 18; (2001) 205 CLR 434 at 441 - 442 [16].

^[162] [2005] HCA 27; (2005) 79 ALJR 1104 at 1106 [5]; Wilkins v Council of the City of Broken Hill [2005] NSWCA 468 at [8]; see also Prast v Town of Cottesloe [2000] WASCA 274; (2000) 22 WAR 474 at 489.

^[163] [2005] HCA 27; (2005) 79 ALJR 1104 at 1106 [5]; Wilkins v Council of the City of Broken Hill [2005] NSWCA 468 at [8]; see also Prast v Town of Cottesloe [2000] WASCA 274; (2000) 22 WAR 474 at 489.

^[164] [2005] HCA 27; (2005) 79 ALJR 1104 at 1106 [10].

^[165] [2005] HCA 27; (2005) 79 ALJR 1104 at 1109 [25].

^[166] [2005] HCA 27; (2005) 79 ALJR 1104 at 1119 [80] - [83] (citations footnoted in original).

^[167] [2003] HCA 61; (2003) 201 ALR 470 at 474 [14].

^[168] See Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [130] .

^[169] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [84] .

^[170] Gold Ribbon (Accountants) P/L v Sheers & Ors  [2005] QSC 198  at  [144] . See also at [64], [69] and [84].

^[171] The trial judge appears to have erred (Gold Ribbon (Accountants) Pty Ltd v Sheers & Ors  [2005] QSC 198  (“Gold Ribbon”) at [109]) when he stated that the third advance was of $420,000. See Bundeson’s report, which stated that the total amount loaned to Jumarsh was $842,000.

^[172] Affidavit of Grant Dene Sparks exhibit GDS1 – Jumarsh file page 16.

^[173] See Gold Ribbon  [2005] QSC 198  at  [109] , [111] and [112].

^[174] See Gold Ribbon  [2005] QSC 198  at  [113] , [116] and [141].

^[175] See Gold Ribbon  [2005] QSC 198  at  [117]  – [119].

^[176] See Gold Ribbon  [2005] QSC 198  at  [120]  and [142]. But see [126].

^[177] See Gold Ribbon  [2005] QSC 198  at  [122] .

^[178] The Jumarsh and Moss loans.

^[179] The Jumarsh loan.

^[180] The Moss loan.

^[181] Gold Ribbon  [2005] QSC 198  at  [112]  and [142].

^[182] Gold Ribbon  [2005] QSC 198  at  [143] .

^[183] Gold Ribbon  [2005] QSC 198  at  [143] .

^[184] Gold Ribbon  [2005] QSC 198  at  [65] -  [68] .

^[185] See Williams JA’s conclusion at [104].

^[186] Gold Ribbon  [2005] QSC 198  at  [134] -  [145] .

^[187] Gold Ribbon  [2005] QSC 198  at  [60] , [58].

^[188] Gold Ribbon  [2005] QSC 198  at  [64] , [61] and [63].

^[189] Gold Ribbon  [2005] QSC 198  at  [69]  and [65].

^[190] Gold Ribbon  [2005] QSC 198  at  [70]  and [107].

^[191] Gold Ribbon  [2005] QSC 198  at  [139] .

^[192] [1992] HCA 27; (1993) 176 CLR 408.

^[193] at 412-413.

^[194] Fitzgerald v Penn [1954] HCA 74; (1954) 91 CLR 268 at 277-278 per Dixon CJ, Fullagar and Kitto JJ, March v Stramare (E & M H) Pty Ltd [1991] HCA 12; (1991) 171 CLR 506 at 515 per Mason CJ, 522-523 per Deane J.

^[195] March v Stramare (E & M H) Pty Ltd.

^[196] Bennett v Minister of Community Welfare [1992] HCA 27; (1993) 176 CLR 408 at 420 (emphasis added).

^[197] See e.g., Duyvelshaff v Cathcart & Ritchie Ltd (1973) 47 ALJR 410; Quigley v The Commonwealth (1981) 55 ALJR 579; 35 ALR 537. See also Hart and Honoré, Causation in the Law, 2nd ed. (1985), pp. 59-61 where the authors identify the hypothetical nature of an inquiry as to the causal significance of providing or failing to provide a person with, or depriving a person of, an opportunity.

 ^[198]  Sutherland Shire Council v Heyman [1985] HCA 41; (1985) 157 CLR 424 at 467 per Mason J. See also Hart and Honoré, op cit., p. 38.

^[199] Permanent Building Society (In Liq) v Wheeler (1994) 11 WAR 187 at 243 – 248.

^[200] Gold Ribbon  [2005] QSC 198  at  [144] -  [145]  (emphasis added).

^[201] Chappel v Hart (1998) 195 CLR 232 at 244 (citations removed).

^[202] See the discussion by Keane JA at [278] herein, and Commissioner of Main Roads v Jones [2005] HCA 27; (2005) 79 ALJR 1104 at 1109 per McHugh J.

^[203] At [273].

^[204] Gold Ribbon  [2005] QSC 198  at  [139] .

^[205] The trial judge accepted Bundesen’s analysis of the transactions: Gold Ribbon  [2005] QSC 198  [128], [130].

^[206] See Hart and Honoré, Causation in the Law, 2^nd ed (1965) at 136, cited by McHugh J in Bennett v Minister of Community Welfare [1992] HCA 27; (1993) 176 CLR 408 at 429 – 430: conduct of this natures negates a causal connexion between a defendant’s negligence and a plaintiff’s damage.